Dollar General and Five Below are two of the biggest names in discount retail. Both stores cater to shoppers looking for a deal, but they do it with very different strategies, store layouts, and target demographics.
Interestingly, both stores have taken a beating in the stock market lately. Both Dollar General and Five Below stocks are down over 40% in the last year.
So, which discount chain is the better investment right now? Let’s take a closer look at Five Below vs. Dollar General, comparing their financial performance and future potential to see which one comes out on top.
Company Overview: Target Market and Business Model
Dollar General and Five Below have carved out distinct niches in the discount retail landscape. Here’s a look at their key strategies:
Dollar General: Focus on Essentials
Dollar General primarily caters to consumers in rural and suburban areas who are looking for value. They provide a wide variety of everyday essentials, from cleaning supplies to food to health and beauty products.
The Dollar General business model focuses on convenience and affordability. With a large network of small stores, they aim to be a convenient, one-stop shop for basic needs at a competitive price. About 20% of their products are priced at $1.
Five Below: Targeting Younger Shoppers
Five Below is geared toward teenagers and pre-teens, offering trendy, affordable merchandise, including toys, fashion accessories, electronics, and room decor. Most items are priced at $5 or less.
Five Below’s business model creates a fun, engaging shopping experience with a constantly changing selection of products, encouraging impulse buys and frequent visits.
Financial Performance: Growth, Sales, and Profitability
So, how do these two discount retailers stack up when it comes to the numbers? Let’s dive into their revenue growth, store expansion strategies, and overall profitability.
Revenue Growth Comparison
Dollar General has seen steady, if somewhat slower, growth, fueled by opening new stores and increasing sales at existing locations. Their net sales compounded annual growth rate (CAGR) was around 9% between 2018 and 2023.
Five Below, on the other hand, has been growing at a faster clip. They’ve benefited from opening a lot of new stores and from their popularity with their target customers. Five Below’s net sales CAGR was about 18% during that same 2018-2023 period.
Store Count and Expansion
Dollar General has a much larger footprint, with a strategy of putting stores in communities that are often underserved by other retailers. They increased their store count from 15,370 in fiscal year 2018 to 19,986 in fiscal year 2023. Looking ahead to 2024, they plan to open 730 new stores, remodel 1,620, and relocate 85.
Five Below is also expanding rapidly, but their strategy is to focus on high-traffic locations. They grew from 750 stores in fiscal year 2018 to 1,544 in fiscal year 2023 and plan to open about 227 net new stores in 2024.
Profitability and Earnings
Both chains are facing some challenges right now. Dollar General is seeing some pressure on earnings because of rising costs, supply chain issues, and more competition. Their earnings per share (EPS) are expected to drop 22-27% in fiscal year 2024.
Five Below is also dealing with some headwinds, but they’re expected to maintain relatively stronger profitability. Their EPS is projected to decline 16-20% in fiscal year 2024.
Challenges and Headwinds
Like any business, both Five Below and Dollar General face a number of challenges that could impact their future performance.
Macroeconomic Factors
Rising inflation is impacting businesses across the board, including these discount retailers. Inflation drives up the cost of everything from raw materials to shipping expenses, and it can also put a damper on consumer spending.
Potential tariffs on imported goods are another concern. Tariffs could further increase costs and potentially disrupt supply chains, creating uncertainty and squeezing profit margins.
Company-Specific Issues
Dollar General has been facing scrutiny over workplace safety violations and employee compensation, including a whopping $12 million settlement with OSHA. The company also cited expenses related to hurricane recovery as a factor impacting fiscal 2024 earnings.
Five Below is heavily reliant on new store openings to fuel its growth. There’s also some uncertainty surrounding same-store sales performance, with expectations that same-store sales could dip by as much as 3% in 2024.
Competitive Landscape
The discount retail space is getting increasingly crowded, with more competition from other discount chains, e-commerce platforms, and traditional retailers. To stay ahead, both Five Below and Dollar General need to adapt to changing consumer preferences and shopping habits.
Stock Valuation and Investment Potential
When it comes to investing, Dollar General and Five Below present very different profiles. Dollar General is trading at a lower valuation, around 12 times its forward earnings, and it offers a dividend yield of about 3%. Five Below, on the other hand, trades at a higher valuation, around 22 times its forward earnings, reflecting its perceived growth potential, but it doesn’t offer any dividend.
It’s worth noting that The Motley Fool Stock Advisor team doesn’t currently recommend Dollar General.
Ultimately, the choice between these two stocks depends on your individual investment goals and risk tolerance. Are you looking for steady income and a more conservative investment, or are you willing to take on more risk for potentially higher growth?
To get a better handle on which stock might be right for you, it’s a good idea to look at what analysts are saying about each company. What are their key strengths and weaknesses? Are there any potential catalysts on the horizon that could boost or hinder their growth? Doing your homework will help you make a more informed decision.
Frequently Asked Questions
Who are Dollar General’s biggest competitors?
Dollar General’s main competitors include Dollar Tree, Family Dollar (owned by Dollar Tree), Walmart, and Five Below. These retailers all target value-conscious shoppers, though they differ somewhat in product mix and store layout. Regional grocery chains and drugstores also provide competition in certain categories.
Is Dollar General actually cheaper?
Whether Dollar General is truly cheaper depends on the specific items you’re comparing and whether you leverage coupons or sales. In some cases, name-brand items might be slightly more expensive at Dollar General compared to larger retailers like Walmart. Store brands, however, are often very competitive.
What makes Five Below different from other dollar stores?
Five Below distinguishes itself through its target demographic (primarily teens and young adults), its focus on trend-driven merchandise, and its brighter, more engaging store environment. While other dollar stores emphasize household essentials and consumables, Five Below offers a broader selection of toys, tech accessories, beauty products, and novelty items, all priced at $5 or below.
Why is Dollar General struggling?
While not necessarily “struggling” in the sense of failing, Dollar General has faced challenges related to supply chain disruptions, inflation impacting consumer spending, and increased competition. Some critics also point to concerns about the company’s labor practices and the impact of its store openings on local communities.
Key Takeaways
Dollar General and Five Below cater to different shoppers with their business models. Dollar General aims for convenience and value in everyday essentials, while Five Below targets a younger demographic with trendy, affordable novelties and discretionary items. Both companies are navigating a tricky economic environment, with inflation and supply chain issues posing ongoing challenges.
Dollar General has shown steady growth and profitability, while Five Below boasts higher growth potential but also carries more risk. As investments, both stocks offer different risk-reward profiles. Dollar General could be considered a more stable, value-oriented play, while Five Below might appeal to investors seeking higher growth.
Remember that this information is for educational purposes only. Before making any investment decisions, do your own thorough research and talk with a qualified financial advisor.