Better Bargain Stock: Dollar General vs. Chewy

There's a 50% discount sale happening right now on some formerly high-flying stocks, with Chewy (NYSE: CHWY) and Dollar General (NYSE: DG) being among them. Investors have abandoned both companies for similar reasons. Consumer demand trends are softening, and weaker earnings are likely on the way.

Stock slumps of that magnitude usually reflect more than just temporary sales challenges. That's why it pays to be cautious when considering buying a stock when it's at a deep discount. Still, it's worth taking a closer look at these growing businesses to see which might be a good fit for your portfolio.

Sales trends

There's a lot more for growth investors to like about Chewy's momentum right now. The pet supply specialist's last earnings report showed solid quarterly sales gains of 14% year over year compared to Dollar General's 3% uptick. Look a bit closer and there are more signs that this business is continuing to connect with its core customers.

Chewy's proportion of Autoship sales rose to a record 75% in mid-2023. Average spending was up an impressive 15% year over year as well, even though shoppers tilted their focus away from higher-priced discretionary purchases. In contrast, Dollar General saw weaker demand across most of its merchandise categories.

Both companies are approaching a potentially tough period ahead, though. Dollar General is slashing inventory and recently lowered its 2023 forecast to call for flat comparable-store sales compared to its prior range projecting gains of 1% to 2%. Chewy executives cautioned investors about a spending slowdown that started in late summer as well.

Cash and outlook

Dollar General is far more profitable, with operating income landing at 8% of sales. Not only is that result well above Chewy's 1% rate, but it also beats value-focused retailing peers like Dollar Tree.

Yet the outlook is brighter on this score for the e-commerce specialist. Chewy's gross profit margin has improved to 28% from 20% of sales in the pre-pandemic period. Management is eyeing further gains in the years ahead as the company pushes into new geographies like Canada and enters new niches like pet insurance and pet healthcare.

Similarly, the cash flow trends are on Chewy's side. While Dollar General's free cash flow has declined in recent years to fall below $100 million, Chewy's recently expanded to a new high of nearly $350 million. Success here implies a strengthening business that can afford to aggressively invest in growth initiatives.

The price is right

The stocks are each valued at three-year lows despite the 12% increase in the S&P 500, suggesting some potentially great returns for investors willing to take on some short-term risk. Dollar General should return to profit growth in short order after it clears out some inventory, and it won't be long before Chewy is back to gaining new customers, either.

Yet it's hard not to prefer Chewy stock right now. It is growing more quickly, targeting big new markets, and boosting customer satisfaction to new highs. Cash flow and profit trends point to potentially strong annual earnings ahead following some volatility in late 2023 into 2024. And, at a 50% discount to previous all-time highs, the risk of overpaying for this growth stock is relatively low.

It might take several quarters for Wall Street to start changing its mind about the pet supply industry, but patient investors can take advantage of that pessimism and scoop up Chewy shares at a big discount today.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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