Will Dollar General or Dollar Tree Stock Keep Rising as Earnings Near?

Dollar General and Dollar Tree stocks have rebounded over 20% year-to-date, driven by turnaround strategies focused on operational efficiency. Dollar General is implementing a "Back to Basics" approach, while Dollar Tree is selling its Family Dollar business to Brigade Capital for $1 billion. Ahead of Q1 earnings, analysts project a sales increase for Dollar General but a slight EPS dip, while Dollar Tree is expected to see declines in both sales and earnings, though both retailers have the potential to surpass expectations; both stocks hold a Zacks Rank #3 (Hold).

Analysis

Dollar General (DG) and Dollar Tree (DLTR) shares have exhibited a strong rebound in 2024, with year-to-date gains exceeding 20% and three-month surges over 30%, although they remain 30% and 25% below their respective 52-week highs of $141 and $121. This recovery is attributed to distinct turnaround strategies: Dollar General is pursuing a "Back to Basics" approach focused on inventory management, store remodels, and shrinkage reduction to enhance operational efficiency. Dollar Tree is divesting its underperforming Family Dollar unit to Brigade Capital for $1 billion, a fraction of its original $8 billion purchase price, with the deal expected to close in Q2 and alleviate declining profitability. Ahead of their Q1 results, Zacks projects Dollar General's sales to increase 4% year-over-year to $10.29 billion, though Q1 EPS is anticipated to dip to $1.47 from $1.65; however, an Expected Surprise Prediction (ESP) suggests a potential beat with the most accurate EPS estimate at $1.51. Conversely, Dollar Tree's Q1 sales are expected to fall to $4.54 billion from $7.63 billion, with earnings forecasted to decline 17% to $1.19 per share from $1.43, though its ESP also indicates a possible beat with the most accurate estimate at $1.25. Despite recent challenges, both retailers trade at an attractive 17x forward earnings, a discount to the S&P 500 and their Zacks Retail-Discount Stores Industry average of 22x, and below 2x sales, which has attracted investors. Both stocks currently hold a Zacks Rank #3 (Hold), underscoring that further upside will heavily depend on demonstrating tangible improvements in operating efficiency and providing favorable outlooks and growth strategy updates in their upcoming reports.

Key Decisions for Investors

• Investors should closely scrutinize the upcoming Q1 earnings reports for both Dollar General and Dollar Tree, paying particular attention to actual performance against expectations, especially the EPS figures relative to the ESP indications, and critically, the forward-looking guidance provided by management.
• Given the current Zacks Rank #3 (Hold) and the significant recent stock appreciation, it may be prudent to await tangible evidence of operational turnarounds from the Q1 results and subsequent management commentary before initiating or significantly increasing positions.
• For Dollar General, monitor key performance indicators related to its "Back to Basics" strategy, such as improvements in inventory turnover, comparable store sales, and progress on reducing shrinkage; for Dollar Tree, assess updates on the Family Dollar divestiture's financial impact and the strategic vision for the core business post-transaction.
• While the current valuation at 17x forward earnings appears relatively attractive compared to peers and the broader market, sustained stock appreciation will necessitate clear confirmation that the respective turnaround strategies are translating into improved operating efficiency and a stronger profitability outlook.