DG Stock Rally Amid Consumer Shift: Fundamentals Tempered by Leverage and Valuation

What happened

Dollar General's stock is rallying as news reports indicate a surge in consumer traffic to dollar stores, potentially signaling broader economic stress. This aligns with DG's Q2 FY2025 performance, where same-store sales increased 2.8% and gross profit rate improved 137 basis points due to lower shrink and damages. However, the DeepValue report highlights that DG operates with elevated leverage, with Net Debt/EBITDA at 6.15x, and valuation appears full at an EV/EBITDA of 46.9x. While traffic gains support the convenience-led model, execution risks on remodels and digital initiatives persist, and share buybacks are restricted until at least January 2026. Thus, the rally may reflect short-term macro trends rather than sustainable fundamental improvements, emphasizing the need for investor caution.

Implication

The consumer shift to dollar stores could boost DG's near-term sales but may pressure margins if it leads to a heavier mix of lower-margin consumables. DG's ability to sustain gross margin improvements from shrink reduction is critical, as reversals could undermine recent operational gains. High leverage at 6.15x Net Debt/EBITDA limits financial flexibility, making the company vulnerable to economic downturns or rising interest rates. Valuation remains a headwind, with DCF models suggesting only ~7% upside and full EBITDA multiples indicating limited room for error. Investors should closely monitor quarterly comps, margin sustainability, and deleveraging progress before adjusting positions, as the rally does not address core execution and balance sheet risks.

Thesis delta

The HOLD thesis remains unchanged; the news of increased consumer traffic supports the positive sales trends reported in Q2 but does not alleviate the elevated leverage, execution risks, or full valuation highlighted in the DeepValue report. If this macro-driven traffic surge persists, it could temporarily boost revenues but also intensify margin pressures from a higher consumables mix, reinforcing the need for vigilant monitoring of fundamental improvements.