Dollar General (DG -1.27%) is a business that needs a catalyst to turn things around, desperately. Over the past 12 months, it has lost more than 40% of its value as simply opening more stores for the sake of increasing sales hasn't been paying off.
The large discount retailer is facing many challenges these days. Not only has it said in the past that its core customer is struggling, many of those cash-strapped shoppers are turning to online retailers for cheap goods. Even if it means waiting a few weeks, shoppers are becoming increasingly comfortable using sites like Temu (which PDD Holdings owns) for the sake of cutting costs.
Dollar General isn't stand pat, however. The company is planning to offer same-day delivery. And depending on how the rollout goes, that could make or break the stock's performance over the next year or two.
Dollar General offers same-day delivery at 75 stores, and plans to expand
In December, Dollar General reported its third-quarter results (for the period ending Nov. 1), which were lackluster, yet again. While the company did grow its sales by 5% to $10.2 billion, that includes the boost it got from opening new locations. If you strip that out, then its same-store sales growth rate was only 1.3%. At a time when shoppers are looking for deals and ways to save, Dollar General isn't seeing a big flurry of activity.
The bigger development, however, was that on its earnings call, management said that it had begun testing same-day delivery at 75 locations. And the goal is much bigger, to offer it at "thousands of stores." The company has partnered with an unnamed third-party to do the deliveries.
For Dollar General, this could potentially be a way for it to reach more customers. And for people who are already shopping online, it could make Dollar General a more attractive option if it means they don't have to physically visit a store location.
Same-day delivery might not necessarily help the bottom line
Offering delivery is a good way for Dollar General to reach different types of customers and serve varying needs. But the danger is that if it does so too quickly and aggressively, the pay off might not be there. Delivery fees can be significant for a business like Dollar General which already runs on tight margins as it is.
DG Profit Margin (Quarterly) data by YCharts
There isn't a lot of room for Dollar General to take more of a hit on its bottom line and still remain profitable. Delivery could certainly help increase sales, but if its margins deteriorate in the process, then little if any of that additional revenue could trickle down to the bottom line.
Is Dollar General stock worth buying today?
Dollar General stock looks cheap, trading at just 12 times its trailing earnings. But with its margins worsening, its same-store sales growth barely over 1%, there's little reason to get excited about the retail stock right now.
The prudent thing for investors to do would be to wait and see how Dollar General's results look as same-day delivery becomes more widespread. If the growth rate starts to accelerate, that might be a positive sign that the delivery service is attracting interest from consumers. But at the same time, investors should also pay attention to the profit margin, to see if there's a further drop there.
However, until Dollar General can show that it's improving its bottom line in a sustainable way, investors should avoid the stock as 2025 could prove to be yet another tough year for the discount retailer.
