Americans turn to Dollar General as cost pressures squeeze budgets

Price: $131, IC View: Buy
Tariff rebates boost profits
Full-year sales guidance upgraded

Low-cost retailer Dollar General (US:DG) is benefiting as Americans are squeezed by the rising cost of living.

Higher petrol prices and borrowing costs have forced some Americans to look for cheaper shopping options. The tightening economic conditions mean Dollar General’s core customers need it “more than ever”, said chief executive Todd Vasos on an earnings call, while it has also been attracting more “upper-middle-income” consumers looking for a bargain.

In the second quarter, Dollar General’s net sales increased by 5.2 per cent to $11.3bn (£8.4bn), while its same-store sales rose by 3.5 per cent. This was its fifth straight quarter of improved traffic.

Operating profit increased by 29.2 per cent to $769.2mn, with around half of this coming from tariff refunds, as the US government had to compensate companies for the illegal import taxes it imposed last year. The rest of the profit boost came from reducing shrinkage and damages, as well as improving distribution productivity.

Management expects net sales growth to continue and has raised its full-year guidance from 3.7-4.2 per cent to 4-4.3 per cent. “We believe that core consumers will continue to be strained as we move through the back half of the year,” said Vasos.

Broker Jefferies believes that because of the higher petrol prices, consumers will increasingly have to rely on Dollar General, which will help it maintain its positive momentum.

Dollar General trades on a forward free cash flow yield of 5 per cent. This is much cheaper than rivals Walmart (US:WMT) and Target (US:TGT), which have free cash flow yields of 1.5 per cent and 4.2 per cent, respectively. Discount retailers are in vogue, and Dollar General is the cheapest of the lot. Buy.

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DOLLAR GENERAL (US:DG)
ORD PRICE:	$131	MARKET VALUE:	$28.9bn
TOUCH:	$131-$131.09	12-MONTH HIGH:	$158	LOW: $95
DIVIDEND YIELD:	1.8%	PE RATIO:	17
NET ASSET VALUE:	$42	NET DEBT:	153%


Half-year to 31 Jul	Total net revenues ($bn)	Pre-tax profit ($bn)	Earnings per share ($)	Dividend per share ($)
2025	21.2	1.05	3.65	1.18
2026	22.1	1.32	4.51	1.18
% change	+4	+26	+24	–
Ex-div:	6 Oct
Payment:	20 Oct
*Includes intangible assets of $4.4bn, or $20 a share