Which of Dollar General's or Five Below's Shares is More Likely to Bounce Back Strongly by 2025?
In the realm of struggling retail stocks, Dollar General and Five Below have taken a hit over the past year. Dollar General (-1.18%) and Five Below (-2.36%) have seen their values halve, as of this write-up. Despite sharing the common theme of budget-friendly goods, their demographics and struggles vary significantly.
Dollar General's woes can be traced back to the hardship faced by its primary customer base due to inflation and intensifying competition from retail giants like Walmart. Conversely, Five Below's issues stem from the Squishmallows craze, a plush toy trend, and the subsequent fallout when the trend decreased in popularity, leaving them with an overload of unsold inventory.
Five Below's sales dwindled in its first fiscal quarter due to Squishmallows-related challenges, but managed to bounce back slightly during Q3. However, negative same-store sales in Q4 dragged down their annual figures. In response, Five Below has expanded its store count by 18% and plans to open 150 more stores in 2026.
In contrast, Dollar General caters more to basic necessities for low-income consumers, who have been heavily impacted by rising inflation. The company has seen modest same-store sales growth, yet desperately needs a 3% increase to drive earnings growth. Meanwhile, Walmart's dominance and competitive pricing have lured away some of Dollar General's clientele.
Assessing valuations, Dollar General holds a lower forward P/E ratio of 11.5 versus Five Below's 17.8. However, Dollar General carries a substantial debt burden of $5.7 billion, whereas Five Below boasts a debt-free status.
Despite the higher valuation, I lean towards Five Below as the more promising rebound candidate due to its strategic steps and recent leadership change with Winnie Park, who brings retail experience catering to younger demographics. As Five Below moves past the Squishmallows fiasco and corrects other merchandising mistakes, it has the potential for a solid comeback.
Dollar General, on the other hand, grapples with a stagnant low-income market and fierce Walmart competition, making its recovery journey more challenging.
Five Below's strategic decision to expand its store count and open 150 new stores in 2026 could attract more customers and help offset the losses from the Squishmallows trend. In the realm of finance, investing in Five Below might offer a higher potential return due to its lower debt and higher growth prospects.
Recognizing the challenges in Dollar General's low-income market and intense competition from retail giants like Walmart, investors might find it prudent to consider diversifying their finance portfolio, potentially by avoiding significant investment in Dollar General stocks.
