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Dollar General (DG +5%) is beginning to see investors allocate dollars back to its stock today after the discount chain announced it would close nearly 100 Dollar General locations (mostly in urban and metro areas) and 45 pOpshelf sites while converting six pOpshelf stores to Dollar General stores. The review cost DG significantly in Q4 (Jan), clipping approximately $0.81 off EPS. However, when excluding this charge, DG surpassed its previously lowered FY25 outlook. Meanwhile, revenue and same-store sales growth tracked in-line with DG's reduced projections in the quarter, potentially aided by the company's comprehensive store remodeling initiative.

The retailer has been revamping thousands of stores, aiming to make them cleaner and more convenient. Alongside plans to fully remodel around 2,000 additional stores this year, CEO Todd Vasos, who stepped into the role in late 2023, announced last quarter that around 2,250 additional locations would undergo a lighter remodeling, including adding produce and updating assortments. The move has not been without its costs; DG plans to maintain spending at a similar rate over the next five years as it did in FY25 at roughly 3% of net sales.

• Mr. Vasos believes the refreshes are already positively impacting sales growth. In Q4, DG again exceeded revenue estimates, delivering a 4.5% increase yr/yr to $10.3 bln, supported by a +1.2% bump in comps. Comps were entirely driven by a 2.3% increase in average transactions, partially offset by a 1.1% dip in traffic, reflecting the ongoing pressures placed on DG's lower-income consumer base, which is disproportionately affected by elevated living costs.
• DG noted that their shoppers' financial situations deteriorated over the past year, dragged down by the cumulative effects of inflation. DG remarked that many of its customers have only enough funds for basic essentials, with some sacrificing spending on these necessities. DG does not anticipate improvement in the grim situation this year.
  • Surrounding tariffs, Mr. Vasos mentioned that the company can mitigate the impact this year, pointing to the success seen during 2018 and 2019 as validation. However, uncertainty remains regarding changes to government entitlement programs.
• As a result, DG's FY26 outlook rings similar to its financial performance in FY25. The company anticipates EPS of $5.10-5.80, revenue growth of +3.4-4.4%, and comps of +1.2-2.2%. Alongside its annual forecast, DG outlined its targets for the next five years, expecting revenue growth of +3.5-4.0%, comps of +2-3% starting this year, and EPS growth reaching +6-7% beginning next year. New stores are also slated over that timeframe, targeting new unit growth of 2% annually beginning this year.

A barrage of stubborn economic headwinds has kept DG down over the past several months but not entirely out. The company's store refresh plans may keep a lid on medium-term profitability, especially if tariffs present outsized challenges. However, DG is worth keeping on the radar as a turnaround candidate. Given its business model of targeting underserved communities, it possesses a decent economic moat. Stepping up its store quality should lift its foundation, spurring a quick reacceleration of growth once economic conditions improve.