What a brutal six months it’s been for Dollar General. The stock has dropped 41% and now trades at $77, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Dollar General, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why DG doesn't excite us and a stock we'd rather own.
Why Is Dollar General Not Exciting?
Appealing to the budget-conscious consumer, Dollar General (NYSE:DG) is a discount retailer that sells a wide range of household essentials, groceries, apparel/beauty products, and seasonal merchandise.
1. Same-Store Sales Falling Behind Peers
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Dollar General’s demand within its existing locations has been relatively stable over the last two years but was below most retailers. On average, the company’s same-store sales have grown by 1.4% per year.
2. Low Gross Margin Reveals Weak Structural Profitability
At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.
Dollar General has bad unit economics for a retailer, giving it less room to reinvest and grow its presence. As you can see below, it averaged a 30.1% gross margin over the last two years. That means Dollar General paid its suppliers a lot of money ($69.88 for every $100 in revenue) to run its business. 
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Dollar General’s $17.57 billion of debt exceeds the $537.3 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $2.94 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Dollar General could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Dollar General can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Dollar General’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 12.8× forward price-to-earnings (or $77 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at Wingstop, a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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