Best Stock to Buy Right Now: Dollar General vs. Dollar Tree

It’s been a tough year for discount retailer investors general dollar (DG -0.06%) and The dollar tree (DLTR -2.03%)and as a result both actions struggle mightily. The good news is that both stocks are trading at very low valuations, so if business turns around, investors stand to gain.

Let’s take a closer look at Dollar General and Dollar Tree to understand what went wrong. Let’s also explore what the future holds for these two battered stocks to determine which has more upside potential.

Here’s why Dollar General and Dollar Tree are battling it out

Because investing is forward-looking, any time a business experiences weak demand, its stock will naturally sell off. Dollar General management recently revised its fiscal 2024 sales forecast from 6% to 6.7% growth to about 4.7% to 5.3%, compared to fiscal 2023 net sales of 38.7 billion dollars. On its most recent quarterly earnings call, management indicated a decline in the average transaction as its key customer “will continue to feel financial pressure throughout the year and the promotional environment will remain elevated above what we originally anticipated. ”

Additionally, Dollar General’s management halted its stock buyback program despite having $1.4 billion remaining, signaling to shareholders that its stock may be overvalued. As a result, Dollar General shares have fallen 32% since reporting its fiscal 2024 second quarter results and are down 38% for the year.

Dollar General’s competitor Dollar Tree is facing similar problems, leading to weaker-than-expected demand. Dollar Tree management revised its fiscal 2024 sales outlook to $30.6 billion to $30.9 billion, down from its original projection of $31 billion to $32 billion. By comparison, Dollar Tree generated net sales of $30.6 billion for fiscal 2023. On the company’s most recent earnings call, Dollar Tree COO Mike Creeden also cited consumer pressures for the revised outlook, noting : “Inflation, Interest Rates and Other Macroeconomic Pressures. have a more pronounced impact on the purchasing behavior of these customers.”

Dollar Tree’s Family Dollar stores are particularly struggling, with management pointing to weaker demand from its lower-income customers. As a result, the company is closing underperforming Family Dollar stores. It also initiated a review of “strategic alternatives”, including “a potential sale, spin-off or other disposition of the business”.

Due to stagnant sales growth and uncertainty surrounding Family Dollar, shares of Dollar Tree are down 50% year to date. Unlike Dollar General, Dollar Tree continued its stock buyback program in its most recent quarter, spending $91 million to buy back 750,000 shares at an average price of $120 per share. In hindsight, that doesn’t seem like the best use of capital considering its stock is hovering around $70 per share.

A deeper look at the financial statements of Dollar General and Dollar Tree

While both Dollar General and Dollar Tree face similar challenges, a closer look at each company’s financial statements will give us an idea of ​​which company is better suited for a turnaround.

Both discount retailers have a similar market cap, with Dollar General at $18.4 billion and Dollar Tree at $15.2 billion helping the comparison. Dollar Tree has a better balance sheet with $3.7 billion in net debt compared to Dollar General’s $7 billion in net debt. As a result, Dollar General paid $300 million over the past 12 months to pay off its debt, nearly three times what Dollar Tree paid.

DG Financial Debt data (quarterly) by YCharts.

For the most recently reported quarter, Dollar General was more efficient at turning revenue into profit, with an operating margin of 5.39%, nearly double Dollar Tree’s 2.75%. As a result of Dollar General’s higher revenue and operating margin, net income was naturally higher at $374.2 million compared to $132.4 million.

In terms of capital allocation, Dollar General continues to expand its footprint. It opened 213 new stores in the second fiscal quarter of 2024, bringing the total number of stores to 20,345. Additionally, Dollar General pays a quarterly dividend of $0.59 per share, equivalent to a dividend yield of 2.8%, but has suspended its share repurchase program as previously noted.

Dollar Tree opened 104 net namesake locations but closed 116 net Family Dollar locations in fiscal Q2 2024, reaching a total store count of 16,388 between the two brands. Dollar Tree doesn’t pay a dividend, but it cut its share count by 1.3% in 2024, giving existing shareholders more ownership — even if it wasn’t the most price-efficient, given see his stock drop. price.

Here’s what could transform Dollar General and Dollar Tree

Both Dollar General and Dollar Tree management teams said their customers are feeling macroeconomic pressure. The good news is that recent developments offer hope that customers of these discount retailers may soon receive a reprieve. The Federal Reserve cut interest rates by 50 basis points to a key rate of 4.75% to 5.00%. The Consumer Price Index recently showed that consumer prices in August rose 2.5% year-on-year, the slowest rate of inflation since the start of 2021. If their thesis is correct, sales could get a boost sooner rather than later.

Valuations are probably the most favorable measure for Dollar General and Dollar Tree. Both stocks look incredibly cheap using the forward price-earnings ratio, which compares a company’s share price to expected earnings over the next 12 months. Dollar General trades at just 14 times forward earnings, while Dollar Tree is even lower at 12.8 times forward earnings. With valuations at their lowest level in three years, these discount retailers can offer a deal not just to their customers, but to investors as well.

DG PE report data (before) by YCharts.

Is Dollar General or Dollar Tree the better stock to buy?

These two discount retail stocks are not for every investor, as significant growth may be difficult in the short term. That said, it’s worth watching a stock whenever it presents an opportunity to invest in a profitable business trading nearly 40% to 50% below recent highs. Between the two, Dollar General is the safer investment due to its consistent earnings growth and dividend compared to the uncertainty of the Dollar Tree Family Dollar brand. Keep an eye on Dollar General’s debt, but if its customers are more resilient than expected, its stock could be, too.