Key Takeaways:
- The “Trade Down” Reality: While Dollar General typically benefits from consumers trading down, recent results show the low-end consumer is under severe pressure, impacting traffic and basket size.
- Operational Challenges: The company is in “test and learn” mode with its new store concepts (popshelf) and international expansion (Mexico), adding execution risk to the turnaround story.
- Price Projection: The Guided Valuation Model points to a target of $147 by January 2028, suggesting the stock is currently overvalued.
- Dead Money Warning: With an implied -1.0% annualized return, the model signals a “Sell” or “Avoid,” as the stock appears priced for a perfection that the current macro environment does not support.
Dollar General (DG) is the undisputed king of the discount retail box, but heavy lies the crown.
Management has been candid about the stress facing their core customer. In the latest earnings call, they highlighted that the “temporary price reduction” (TPR) program is critical to driving traffic, suggesting they are having to buy sales with margin.
While the company touts its “price perception” and the “halo effect” of the dollar price point, the financials tell a story of stagnation.
The company is pushing forward with remodels and new initiatives like popshelf, but as management admitted, these are still in the “test and learn” phase. For a stock trading at $150, “testing” is not enough to justify a premium valuation.
Financially, the growth engine has sputtered.
Revenue growth has decelerated to 5.0% over the last year, lagging the 10-year historical average of 7.9%. More concerning is the margin profile, which has compressed significantly from historical norms.
What the Model Says for DG Stock
This analysis evaluates DG’s potential through 2028, factoring in a modest recovery in growth but persistent margin headwinds.
The model signals a “Sell / Avoid.”
Using mid-case assumptions, the model points to a target price of $147.20 (rounded to $147) by January 2028.
This implies a negative -1.0% annualized return from today’s levels.
Ideally, investors want to see double-digit returns to compensate for equity risk. A negative return is effectively “dead money” when compared to risk-free treasury rates, suggesting the stock is fully valued or even overvalued at current levels.
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Our Valuation Assumptions
TIKR’s Valuation Model lets you plug in your own assumptions for a company’s revenue growth, operating margins, and P/E multiple, and calculates the stock’s expected returns.
Here’s what we used for DG stock:
1. Revenue Growth: 4.4%
The model assumes growth remains muted.
While the 10-Year Historical CAGR is 7.9%, the model forecasts a more conservative 4.4% growth rate through 2028.
If the consumer weakens further and growth stays in the low-single digits, the downside to the $147 target is significant.
2. Operating Margins: 5.2%
Profitability remains the key concern.
The model assumes margins compress to 5.2%, significantly below the 5-Year Historical average of 8.4%.
This margin compression reflects the intense competitive environment and the cost of price investments (TPRs) needed to drive traffic. If margins cannot stabilize above 5%, the stock could see further de-rating.
3. Exit P/E Multiple: 16.9x
The valuation assumes a slight multiple compression.
The exit multiple is set at 16.9x, down from the 5-Year average of 18.4x.
This lower multiple reflects the market’s skepticism about DG’s ability to return to its historical growth and profitability profile in the near term.
What Happens If Things Go Better or Worse?
The skew is to the downside given the negative base return (these are estimates, not guaranteed returns):
- Bear Case: If margins deteriorate below 5% and growth stalls, the stock could trade down to $130 or lower.
- Mid Case: With a 4.4% growth rate and 5.2% margins, the target is $147, offering a -1.0% Annual Return.
- Bull Case: To generate a buyable return (>10%), DG would need to aggressively expand margins back to peak levels (>8%) and accelerate store growth, a scenario that seems unlikely in the current macro environment.
See what analysts forecast for the next 5 years for DG stock (Free with TIKR) >>>
How Much Upside Does DG Stock Have From Here?
With TIKR’s new Valuation Model tool, you can estimate a stock’s potential share price in under a minute.
All it takes is three simple inputs:
- Revenue Growth
- Operating Margins
- Exit P/E Multiple
If you’re not sure what to enter, TIKR automatically fills in each input using analysts’ consensus estimates, giving you a quick, reliable starting point.
From there, TIKR calculates the potential share price and total returns under Bull, Base, and Bear scenarios so you can quickly see whether a stock looks undervalued or overvalued.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!
