We recently compiled a list of the 10 Best Discount Retailer Stocks to Buy. In this article, we will look at where Dollar General Corporation (DG) stands against other discount retailer stocks to buy.

Overview of the Discount Retail Sector

With half a decade of geopolitical chaos, recession in Europe, and above-target inflation, the US economy has remained resilient. The primary reason behind this is the American consumer: their spending makes up around 70% of the country’s gross domestic product. However, recent calculations have been showing a decline in amount of money Americans are spending.

A recent survey by accounting firm KPMG corroborated this pattern, finding that while people were optimistic about their economic standing, they harbored doubts and skepticism about the direction the US economy is headed. The survey also found that nearly 65% of participants expected to do more discount shopping this year. Around 60% of this number made $200,000 or more. In addition, around 14% said that they were planning to use buy now, pay later services.

Brian Moynihan, CEO of Bank of America, said that he also noticed a slowing in purchase rates of his customers. Consumer payments grew by 3.5% since last year, down from a 10% growth from the year before. This included measurement through checks, credit cards, and ATM withdrawals.

The discount retail industry in the US thus holds a promising outlook. This positive outlook is fueled by technological advancements, changing consumer preferences, and strategic adjustments. Shoppers across the retail industry are prioritizing value over everything else, including cheap prices. This is why retailers like Dollar Tree Inc. are struggling, while business in stores like Target and Walmart is booming. A similar trend is also taking place in other industries, with companies like Applebee undergoing increasing sales while consumer sentiments about giants like McDonald’s are showing signs of waning.

The Consumer Goods and Retail Outlook 2024 report by Economic Intelligence forecasts global retail sales to grow by 6.7% in dollar terms in 2024. While 85% of these sales are expected to stem from brick-and-mortar stores, 2024 is expected to be the strongest growth year for offline retail after 2021. Inflation is also easing in 2024, but that does not seem to affect increasing consumer preference for lower prices, prioritization of basic life goods, and an unwillingness to pay hefty delivery fees. These factors are likely to drive consumers on a bargain-hunt to discount retailers.

The discount retail industry is one of the most resilient sectors in the face of economic unpredictability, strengthened by its ability to offer affordable services and goods. Product discount campaigns are emerging across the country, showing positive development trends and becoming some of the hottest topics in retail. Effective inventory management, better pricing, and operational initiatives are likely to boost sales in discount retail companies, provided they offer the one thing customers are increasingly looking for: value.

The US led the largest market for discount store retail across the globe in 2023, amassing $128 billion in sales. According to data reported by The Wall Street Journal, average consumer spending on grocery items at discount retailers increased 71% between October 2021 and June 2022. In addition, consumer patterns are also showing an increased inclination towards e-commerce, which is pushing companies to solidify their digital presence. Successful retailers are endeavoring to meet their customers both in-store and online, which is why 9 out of the top 10 e-commerce websites are run by retailers with brick-and-mortar stores.

Similar trends are appearing across the world, with discount stores rising to a prominent industry standing over the past years in the US, Europe, and Japan. Zhang Qiang, founder and CEO of Hitgoo, a discount retail chain, said that the next decade in China is likely to be marked by discount store expansion. Since the discount store model focuses on food and daily use merchandise, it can be successful in both the domestic and international market, presenting new opportunities.

Our Methodology

We used the Finviz stock screener to identify stocks in the discount retailers business. We then shortlisted the stocks that were the most widely held by hedge funds, as of Q2 2024. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Dollar General Corporation (NYSE:DG)

Number of Hedge Fund Holders: 42

Dollar General Corp (NYSE:DG) is an American retailer that runs a chain of discount stores across the US and Mexico. It offers a wide and discounted selection of merchandise, including consumable products like food, beauty, health, pet supplies, and cleaning products, as well as non-consumable items such as seasonable merchandise. It operates around 2,000 stores, and announced plans to open more than 800 stores across the US at the opening of its 20,000th store. The company also announced plans to remodel around 1,500 locations and relocate 85 stores in 2024.

Dollar General (NYSE:DG) is among the several retailers that have suffered under deteriorating economic conditions. Its Q2 2024 results fell short of expectations, primarily because its majority customer base of lower-income families suffered due to inflation. However, with inflation bubbling down, the company is expected to make a comeback. It is moving to compensate for losses and improve its profit margins by improving its stores and inventory handling. Enhancing the appeal of its stores is one of the company’s efforts to increase customer engagement.

In addition, Dollar General Corp (NYSE:DG) is one of the companies in a good position to benefit from the cuts in interest rates by the US Federal Reserve in September. The cuts are anticipated to increase liquidity in the market, which can drive sales by benefiting customers. The company is also working to ensure an accurate and timely supply chain, while improving its customer-center merchandising and in-store execution. It has plans to enhance customer experience by increasing employee presence at the front end of its stores and ensuring that its associates provide increased engagement to customers. It is also focusing labor hours on perpetual inventory management to facilitate its sales growth and improve in-stock levels.

Dollar General (NYSE:DG) is currently trading at a forward P/E of 14.23 at a 21% discount to its sector. 42 hedge funds hold stakes in the stock as of Q2 2024. Artisan Value Fund stated the following regarding Dollar General Corporation (NYSE:DG) in its fourth quarter 2023 investor letter:

“Our biggest full-year detractors included energy holdings Schlumberger and EOG and 2023 purchases Baxter International and Dollar General Corporation (NYSE:DG). Dollar General, a discount retail chain in the US, has dealt with a few struggles. The retailer had previously benefited from COVID stimulus checks, reflected in the bump it experienced in revenues and margins.

However, the effects have worn off, and its core consumer has been hurt by inflation, stiffer economic conditions, lower tax refunds and reduced SNAP benefits. Margins are also under pressure due to labor costs, shrink and markdowns. Some of the issues are likely self-inflicted. After years of focusing on store growth to drive the top line, store standards have suffered. Addressing store standards is needed to turn around flagging traffic, comps and customer satisfaction. On the positive side, discount retail due to its trade-down feature tends to be a defensive business during economic slowdowns.

Dollar General has a strong market position and faces less competition than other discounters due to its largely rural footprint. The business’s value proposition is everyday low prices, a convenient format, and proximity. The company has leverage due to capital expenditures, but interest coverage of ~9X is strong. From a valuation perspective, the froth from the pandemic, when it traded in the low- to mid-twenties, is gone. So, we aren’t paying for margin upside or store growth. Those would be bonuses. If the company can continue to grow revenues, generate cash flow, and buy back stock, we still see a path to success.”

Overall DG ranks 5th on our list of the best department store and discount retailer stocks to buy. While we acknowledge the potential of DG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure: None. This article is originally published at Insider Monkey.