Dollar General: a turnaround stock in the making

I loved my past life as a commercial real estate (CRE) developer.

Not that I don’t love my life today, analyzing and sharing investment opportunities with the Wide Moat Research community. Because I definitely do.

But I still have to recognize:

For instance, some of the companies I worked with back then are still operating today as publicly traded entities. This includes my first-ever customer, Advance Auto Parts (AAP).

Back around 1990, that business was privately owned but aggressively expanding. So while I can’t say I was there from its inception, I did get to see what it’s made of – information that has certainly helped me assess it over the years.

The same goes for other continuing success stories such as The Sherwin-Williams Company (SHW)… as well as the since-failed Payless ShoeSource and Blockbuster Video. Even those latter two companies taught me some very valuable lessons – like how not every beaten-down company recovers.

Sometimes, flagging shares are flagging for a reason.

Then again, sometimes they’re just misunderstood. That’s why investors must carefully evaluate every single low-cost opportunity that comes their way: the balance sheet, competitive positioning, management team, and long-term durability.

Our job is to determine whether a company’s business moat is widening or narrowing. And I’m particularly intrigued by Dollar General (DG).

Dollar stores have been under pressure for years, due in part to overexpansion and poor execution. But there have been new developments for Dollar General in particular.

Between those and my deep understanding of its past, I’m seeing some definite buyable signs.

I first began developing for Nashville-based Dollar General in the mid-1990s. At the time, it operated roughly 3,000 stores around the country, and few people were paying it much attention.

To some degree, that was understandable, given that Dollar General was a no-frills setup. Its stores were simple and inexpensive to build, and they were largely situated in rural communities and secondary markets – the kinds that other retailers simply didn’t bother with.

Today though, it runs over 20,000 locations, making it one of the most remarkable retail growth stories of the last four decades. And while its past performance alone doesn’t automatically make this a worthwhile investment opportunity, it’s still worth considering.

Especially when you add in the Q1 2026 results it reported last week.

For one thing, Dollar General beat profitability expectations, with net sales rising 3.4% to $10.8 billion. Same-store sales increased by 2%. And customer traffic grew for the fourth quarter in a row, this time up 1.4%.

The company also gained market share in both the consumable and non-consumable categories. This surprised some considering that its lower-income clientele continues to feel pressure from both higher fuel costs and reduced food stamp benefits through the Supplemental Nutrition Assistance Program (SNAP).

Certainly, its core customers remain financially stressed. Yet it still saw growth across all income cohorts. In fact, probably because of those stressors, households earning more than $100,000 annually have been frequenting Dollar General stores more often.

Its $1-value offerings remain highly popular across the board, with its Value Valley program posting 18.4% comp growth for the quarter. And it’s also worth noting:

All reasons why I have to conclude that Dollar General still has what it takes to make it after all.

Not that Dollar General is taking any of that expansion for granted. It’s working hard to facilitate it.

All told in Q1, it completed 659 “Project Renovate” remodels, redesigning entire store layouts. It enhanced another 711 locations through its “Project Elevate” program. And it opened 190 new stores, keeping it on track to open 450 for the full year.

Best yet, this was all done while strengthening its balance sheet and improving liquidity. Management reiterated on Dollar General’s earnings call that it’s committed to preserving its BBB credit rating and maintaining leverage below 3x adjusted debt-to-adjusted EBITDAR (earnings before interest, taxes, depreciation, amortization, and rent or restructuring costs).

They also emphasized that inventory isn’t a problem anymore like it was several years ago. CEO Todd Vasos and CFO Donny Lau both repeatedly highlighted Dollar General’s successful efforts to expand margins rather than struggle with them.

All of that good news is what led management to increase full-year EPS guidance from $7.10–$7.45 to $7.20–$7.45. Plus, it now expects sales to grow 3.7%–4.2% and same-store sales to increase by 2.2%–2.7%.

As for its dividend (which admittedly only yields around 2.2%-2.5%), Dollar General’s board just approved a $0.59 Q2 payout. Using midpoint EPS guidance of $7.33, that looks well-covered with an annual dividend run rate of about $2.36 per share.

This gives it a payout ratio near 32%, which is very conservative for a mature retailer.

Looking at all that data – complete with margin expansion, positive traffic growth, and strong cash flow – it’s hard not to conclude that this company is no longer distressed.

Yet at roughly 14x–15x forward earnings, it’s still trading below its historical norm of 18.7x. So there’s clear room for share-price appreciation.

Analysts see 8% growth in 2027, 9% growth in 2028, and an even more impressive 12% in 2029. Assuming a return to normal valuation by the end of 2028, Dollar General could return around 30% annually for investors who get in now.

My Wide Moat Confidential subscribers have seen how well my former CRE clients can pan out. One of our most successful recommendations was the aforementioned Advance Auto Parts, my very first customer.

The stock fell deeply out of favor last year after investors began worrying about operational challenges and competitive pressures. That was understandable for a time… Yet as so often happens, the market went too far and too long on that fear.

So Confidential took advantage of that fact.

As conditions improved and management executed its turnaround strategy too noticeably to ignore, AAP shares rebounded sharply… rewarding my readers with around 100% gains in just 30 days.

That experience reinforced an important lesson I've learned many times throughout my career: When it comes to high-quality companies, the best opportunities are often found where fear is highest and expectations are lowest.

Let’s see if Dollar General proves the same.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

Here’s an abbreviation that might be new for you: HALO.

In the investing world, it now stands for businesses with “Heavy Assets” and “Low Obsolescence.”

Attributed to Ritholtz Wealth Management CEO Josh Brown, HALO investments are assets that AI just can’t disrupt, from major oil companies to major food companies to major retailers.

Ritholtz has his list, of course. And Wide Moat Research has ours… including some with compelling valuations I covered in last week’s Wide Moat Show.

You can catch the full episode right here.