Dollar General (NYSE:DG) has to be the worst bull thesis of my life. Barely 18 months ago, I issued a rare “strong-buy” rating when this stock traded at $212 apiece, well above today’s price of $80 and sinking. The retailer has recently announced earnings and guidance that sent investors running to the exits in a stampede.

As shares approach a massive drawdown of 70% (see purple line below), this seems to be the perfect time to revisit the failed thesis. Is DG a bargain stock, trading at a mere 13.5x current-year earnings multiple that has rarely (if ever) been seen before, or is it a falling knife that should be avoided?

My bull thesis through 2023

It may help to quickly summarize, in three bullet points, the key pillars of my old bull thesis. After that, I will address how the story has shifted over the past few months before finally concluding if DG is worth owning at current levels.

• The “boring factor”: To quote my most recent article, “Dollar General has a great business model, one that is much more resilient to the ups and downs of the economic cycles than what investors may be able to find elsewhere in the market,” despite the company operating a relatively low-growth, low-margin business. The noncyclical (possibly counter-cyclical) aspect seemed like an asset if or when the economy turned sour.
• Quality management: Through last year, the management team executed consistently well and kept comps elevated, despite the “boring” business model. The company also seemed competent at executing its footprint expansion strategy, as it opens roughly 1,000 new locations each year while maintaining margins stable.
• Reasonable valuation: DG never traded at bargain levels due to, in my opinion, its cycle-resilient business model. Historically, a trailing P/E floor of 15x seemed well established (see chart below). Therefore, buying into the stock at a forward earnings multiple of 18.8x, which was the case in March of last year, seemed reasonable to me.

What has changed

From what Dollar General’s management team has alluded to in the most recent earnings call, the company seems to be suffering from a cash-strapped consumer:

“The majority of [the retailer’s consumers] state that they feel worse off financially than they were six months ago as higher prices, softer employment levels, and increased borrowing costs have negatively impacted low-income sentiment. […] Inflation has continued to negatively impact [lower income] households with more than 60% claiming they have had to sacrifice on purchasing basic necessities due to the higher cost of those items, in addition to paying more for expenses such as rent, utilities, and healthcare.”

This scenario could be playing a role in heavier promotional activity and lower average unit retail price per item, which in turn have contributed to comps of only 0.5% in the most recent quarter that were below expectations. This seems to be an unfortunate, yet potentially temporary issue that could reverse in a scenario of lower inflation and lower interest rates.

The concern is that there could also be a few Dollar General-specific issues impacting the company’s ability to grow revenues and sustain margins. For instance, profitability took a hit in the most recent quarter due, in part, to increased inventory damages – something that the company should have at least some control over. On the competitive front, at least one sell-side analyst speculates that Walmart (WMT) may be eating Dollar General’s lunch and hurting other players in the dollar space, maybe permanently.

If Dollar General’s woes are mostly temporary and likely to be resolved by a combination of a better macroeconomic environment and the outcome of the company’s “back to basics” initiative, then DG is certainly a cheap stock today. The 13.5x current-year P/E coupled with 14% expected growth in fiscal 2026 EPS points at a rare instance of PEG below 1.0x for the Tennessee-based retailer’s stock.

In this optimistic scenario of recovery, I would expect to see DG recover strongly as Target (TGT) did in 2017 – in that case, one of my most successful and well-timed bullish calls. Back then, the retailer threw in the towel to Walmart’s competitive superiority and began executing a turnaround plan that worked out in the end. TGT share price quadrupled in only four years, while P/E rebounded strongly from 12.8x in 2017 to 21.2x in mid-2021.

In a more pessimistic scenario, however, Dollar General could succumb to competitive pressures and the complexities of operating a massive fleet of 20,000 stores spread across all four corners of the US, including in hard-to-reach rural areas. Should this be the case, the retailer may never again return to its admirable old self. The benefits of a well-run, non- or counter-cyclical business model would become all but irrelevant in the face of a struggling retailer dealing with company-specific challenges. The share price and valuations may never recover meaningfully or at all.

Don’t be a hero: wait to ride the rebound

I find it hard, at this moment and without digging deeper into the story, to project exactly what happens next. However, it seems clear that Dollar General is at a fork in the road. What is least likely to happen to the share price, in my opinion, is a smooth climb of 8% or 9% per year indefinitely. Instead, I see the stock either recovering strongly in the bullish case or continuing to tread water at best, for a good while, in the bearish case.

In “all or nothing” situations like these, I think that the best course of action is to sit on the sidelines for now and watch the price action closely. For instance, buying the stock only above the 100-day moving average and selling shares below it nearly ensures that investors are not caught holding a live grenade, while at the same time allowing them to partake in the lion’s share of the share price recovery if it eventually materializes.

Take the TGT case as an example. Even those who did not have my same convictions in the bullish case back in mid-2017 could have made a pretty penny by following a 100-day moving average strategy, as the chart below suggests: estimated cumulative gains of 88% in 2018 and 2019 alone, and 200%-plus from late 2017 through early 2022.

I will likely spend a bit more time in the future dissecting the Dollar General story, as this could eventually become an opportunity for strong double-digit returns in the foreseeable future. But for now, I step aside and downgrade this stock to a neutral rating.