Walmart (WMT) vs. Dollar General (DG): Which Grocery Stock Is a Year-End Buying Opportunity?

The grocery sector is known for its inherent stability, which persists even in the face of economic uncertainties. This robustness is attributed to the constant and unyielding demand for essential food items, regardless of economic fluctuations, ensuring a stable environment for companies operating in this industry.

Given the backdrop, this article assesses the fundamentals of two leading grocery companies, Walmart Inc. (WMT) and Dollar General Corporation (DG), to determine which one could be the better year-end portfolio addition.

The U.S. grocery industry is anticipated to experience a substantial 5.6% growth in 2023, reaching a noteworthy size of $1.50 trillion, as revealed by Coresight Research. This expansion is fueled by various factors, such as lower inflation rates and the growing importance of unconventional grocery retailers.

Moreover, the supermarkets and hypermarkets sector is anticipated to experience a CAGR of 6.5%, reaching a market value of $4.35 trillion by 2027. This growth can be attributed to technological advancements, particularly in the precise analysis of retail data, which plays a pivotal role in meeting customer expectations.

Furthermore, the outlook for the grocery industry is strengthened by the increasing importance of e-commerce, a trend that has been escalating since the beginning of the pandemic. The pandemic accelerated the adoption of online shopping by consumers, and this shift has endured beyond the pandemic period.

For instance, an increasing number of Americans are opting for online platforms to satisfy their grocery requirements, with online sales expected to constitute 13.5% of the overall grocery market in 2023. Additionally, the anticipated surge in online grocery shopping sales, reaching nearly $190 billion by 2024, is attributed to enhanced convenience and improved delivery choices in the country.

Considering the industry’s favorable outlook, WMT and DG should benefit. However, WMT appears to have outshined DG in terms of price performance by surging 6.7% over the past year compared to DG’s 46.5% plunge during the same period.

Moreover, WMT’s shares soared 8.4% year-to-date to close the last trading session at $153.71. In contrast, DG’s shares plummeted 47.7% year-to-date to close the last trading session at $128.91.

However, to find out which Grocery/Big Box Retailers stock is the better pick, let us dig deeper into the fundamentals of the featured stocks.  

Recent Developments

On November 21, WMT announced its plans to introduce parcel stations to their existing 4,000 stores operating as delivery hubs. These parcel stations are designed to further expedite the transportation of goods to customers’ homes by leveraging the company's Private Fleet for the delivery of a broader range of online orders.

The concept of a parcel station is similar to a miniature post office, emphasizing its role in efficiently handling the receipt and delivery of packages.

This development underscores WMT’s dedication to leverage its extensive physical presence and logistics capabilities to optimize the online shopping experience for its customers.

On December 6, DG declared a quarterly dividend of $0.59 per share, payable to its shareholders on or before January 23, 2024. The company’s annual dividend of $2.36 translates to a 1.82% yield on the prevailing prices, while its four-year average dividend yield is 0.91%. Its dividend payouts have grown at CAGRs of 18.2% and 15.5% over the past three and five years, respectively.

Recent Financial Results

WMT’s revenue for the fiscal third quarter (ended October 31, 2023) increased 5.2% year-over-year to $169.80 billion. Its operating income came in at $6.20 billion, up 130.1% from the year-ago value. Moreover, the company’s net income amounted to $453 million and $0.17 per share versus a net loss of $1.79 billion and $0.66 per share in the same period last year, respectively.

On the contrary, for the fiscal third quarter, which ended on November 3, 2023, DG’s revenue increased 2.4% year-over-year to $9.69 billion, while its gross profit declined 2.5% from the year-ago value to $2.81 billion. Moreover, the company’s net income and EPS came in at $276.25 million and $1.26, down 47.5% and 45.9% from the prior-year quarter, respectively.

Past and Expected Financial Performance

WMT’s net income has declined at a CAGR of 6.2% over the past three years. Meanwhile, its EBIT grew at a CAGR of 3.8% during the same period. Street expects WMT’s EPS for the fiscal fourth quarter (ending January 2024) to come in at $4.31. While its revenue for the same quarter is expected to increase 3.9% year-over-year to $160.09 billion.

Conversely, DG’s net income and EBIT have declined at CAGRs of 9% and 6.3% over the past three years, respectively. Analysts predict DG’s EPS and revenue for the fourth quarter (ending January 2024) to decline 41.9% and 4.1% year-over-year to $1.72 and $9.78 billion, respectively. 

Profitability

WMT’s trailing-12-month levered FCF margin of 1.63% compares to DG’s negative 0.30%. Additionally, WMT’s trailing-12-month cash per share of $4.51 is higher than DG’s $1.66. Furthermore, WMT’s trailing-12-month asset turnover ratio of 2.52x is higher than DG’s 1.31x.

Thus, WMT is more profitable.

Valuation

In terms of the forward EV/EBITDA ratio, DG’s 14.20x is 12.3% higher than WMT’s 12.64x. Also, DG’s forward EV/EBIT multiple of 18.93 is 3.8% higher than WMT’s 18.24. Furthermore, DG’s forward Price/Sales ratio of 0.74x is 13.8% higher than WMT’s 0.65x.

Thus, WMT is more affordable.

POWR Ratings

WMT has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, DG has an overall rating of C, translating to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. WMT’s C grade for Growth is justified by its mixed historical growth over the past three years. On the other hand, DG’s F grade for growth is in sync with the declining growth metrics over the past three years.

Moreover, WMT has a B grade for Momentum, justified by its share price currently trading above its 10-day moving average of $152.91. While DG’s B grade for Momentum is in sync with its current share price trading above its 10-day moving average of $128.57.

Among the 37 stocks in the A-rated Grocery/Big Box Retailers industry, WMT is ranked #19, while DG is ranked last. 

Beyond what we’ve stated above, we have also rated both stocks for Value, Stability, Sentiment, and Quality. Click here to view WMT’s ratings. Get all DG ratings here.

The Winner

While both WMT and DG should benefit from the promising industry landscape, WMT’s superior financials, higher profitability, lower valuation, and upbeat analyst sentiment could make it a better investment candidate for your portfolio over DG.

Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Grocery/Big Box Retailers industry here. 

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WMT shares were trading at $154.02 per share on Thursday afternoon, up $0.31 (+0.20%). Year-to-date, WMT has gained 10.28%, versus a 24.62% rise in the benchmark S&P 500 index during the same period.

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