Dollar General is rallying, but have investors overlooked this important growth story?

this S&P 500 (snpindex: ^gspc) So far in 2025 it has basically not arrived, but it has done it in an exciting way. However, the market correction does not seem to have any effect US dollar general (NYSE: DG) Stocks rose, while the S&P 500 fell. At the time of writing, Dollar General grew 15% on the market as usual.

Before you rush to buy stocks that are better than the dollar, you need to know this overlooked "growth" story.

From a huge perspective, Dollar General is a retailer. But it focuses on selling products at low prices. Furthermore, it targets fewer affluent markets served by larger retailers, especially large stores, e.g. Walmart and Target. The purpose is to provide consumers with a mix of convenience and low prices.

Image source: Getty Images.

That is to say, it is important for investors to understand that low prices do not necessarily mean low prices. For example, at Dollar General, a person can buy a roll of toilet paper at a low price. But every roll of toilet paper from a large gear from a big store may actually end up being a cheaper option. Dollar General is basically aimed at customers who can’t afford giant packaging, not wanting to take the extra distance to big stores, or both.

Currently, Dollar General's business model is favored on Wall Street. This is because its low-price models tend to be relatively good during periods of economic weakness. There have been concerns that the U.S. economy could fall into recession in 2025 due to geopolitical and tariff issues.

Spy Chart
YCHARTS spy data

In many ways, it is understandable that investors are now interested in Dollar General. Its core low-income customers may need to continue shopping in stores, while high-income customers may trade on economic issues. But there is an interesting story when you dig deeper into Dollar General's business.

Effectively, the core of dollar sales is consumer staple foods – things like personal hygiene products, paper products, and food. In 2024, this category accounted for 82.2% of sales. The remaining sales came from seasonal goods, household products and clothing, accounting for 10%, 5.1% and 2.7% of sales, respectively. These three categories are crucial to Dollar General’s bottom line, as they have higher profit margins than the consumer staples they sell.

DG Chart
YCHARTS DG data

This is where the “growth” problem occurs. Major consumer sales increased from 79.7% in 2022 to 82.2% of current levels. At that time, the other three high-profit categories all fell steadily.

This seems to be a small change, but retailers often live on the brink of very nervousness. This is especially true for retailers who sell to low-income customers in a low-price point model. Dollar General's main consumer sales have been growing, but therefore its profit margins have been declining. As a highlight of the chart, the stock comes with it.

It makes sense that investors have viewed Dollar General as a safe haven investment in a time of economic uncertainty. However, there are deeper issues here, as the company wants to reverse its business. It is cutting costs, focusing on tuning its portfolio and upgrading its stores to improve performance.

This is a long-term investment opportunity for the right investors. But if you only own Dollar General because you think you're doing well in a recession, you might be missing a real "growth" story (increasing sales of lower-profit products) is actually a business headwind.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. Motley fool has a place and recommends Target and Walmart. Motley Fool has a disclosure policy.

Dollar General is rallying, but have investors overlooked this important growth story? Originally published by Motley Fool