Geoffrey Seiler, The Motley Fool
6 min read
In This Article:
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Dollar General is starting to benefit from more affluent customers trading down on their shopping choices.
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However, its core customer base remains under pressure.
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The stock, meanwhile, is no longer in the bargain bin after a strong rally.
Dollar General (NYSE: DG) has struggled in recent years, as inflationary pressures hurt its lower-income consumer base. However, the stock staged a strong rally following its fiscal first-quarter earnings report. As of this writing, it is up 50% in 2025.
Let's take a closer look at its most recent earnings report and commentary to see whether this rally is sustainable or if the worst is not really behind it just yet.
On the surface, tariffs would seem to be a big negative for a company like Dollar General. After all, the retailer's core customer base was already feeling pressure from higher prices due to inflation, and it looked like it was losing share to big-box price leader Walmart (NYSE: WMT). However, the company has begun to see more higher-income consumers frequent its stores in search of value.
The retailer said it plans to minimize the impact of tariffs on its gross margins as much as possible without raising prices, although it could increase prices as a last resort. It plans to do this by working with vendors to cut costs, moving some manufacturing to other countries, and tweaking its product lineup by making changes or swapping out certain items. It noted that a mid- to high-single-digit percentage of its overall purchases are directly imported from China, but about double that percentage comes indirectly from the country.
The inroads with higher-income consumers contributed to a 2.4% increase in same-store sales in the quarter. While traffic fell by 0.3%, its average checkout ticket rose by 2.7%. Growth came from gains in the food, seasonal, and home & apparel categories.
Same-store sales is a very important metric for Dollar General, as it has said in the past that it needs to grow its comparable-store sales by around 3% for it to leverage its expenses and grow its earnings. However, the composition matters, and growth from high-margin areas, such as seasonal items, helped power its earnings higher. This appears to be largely a reflection of higher-income consumers shopping at its locations, as well as its efforts to improve the customer experience and offer better merchandising in categories such as seasonal decor and home items.
The company also said that its newer pOpshelf store concept -- which is meant to provide a fun and affordable shopping experience with a focus on home goods, seasonal decor, and party supplies -- performed well, exceeding expectations.
