Best Stock to Buy Right Now: Walmart vs. Dollar General

Walmart (NYSE: WMT) and Dollar General (NYSE: DG) compete more fiercely than any other retailer for the spending of rural, lower-income Americans.

Walmart is much bigger than Dollar General and serves customers well beyond that demographic, but that remains its core strength. After all, Walmart is synonymous with everyday low prices, and its superstores are most dominant in rural America, while it has struggled to gain significant market share in cities.

Because of their reputations for low prices and discount products, both Walmart and Dollar General are seen as resilient stocks in a potential recession. So, with consumer sentiment having fallen sharply, it's a good time to consider which might be the better buy between the two.

Let's take a look at how they stack up side-by-side.

Image source: Getty Images.

Business model: Walmart versus Dollar General

Walmart and Dollar General are retailers, and both make most of their revenue from essentials like groceries. However, there are some key differences between the two companies.

Walmart's core business is its stores, but its sprawling retail empire includes Sam's Club and stores in several countries around the world, including Mexico, the U.K., and China. Walmart has also built a strong e-commerce and omnichannel business and an emerging advertising business building onto its e-commerce marketplace.

In its first-quarter report, global e-commerce sales jumped 22%, and its global advertising revenue jumped 50%, benefiting from its acquisition of Vizio. With those emerging businesses, Walmart has become more than a brick-and-mortar retailer, as it is also exposed to growth businesses.

While Walmart has hit the brakes on new stores, Dollar General has more stores than any other retail banner in the U.S., finishing the fourth quarter with 20,594 locations.

However, after struggling over the last two years, Dollar General has slowed the pace of its store openings, investing instead in store remodels, its Back to Basics plan (which includes changes to its supply chain), improved inventory management to eliminate out-of-stock inventory, and ensuring that the checkout area is well-staffed.

Dollar General has lost market share to Walmart and other competitors in recent years, and profit margins have fallen sharply, leading it to launch a turnaround plan and reinvest in the business.

Financials: Walmart versus Dollar General

Many retailers have struggled in recent years due to inflation and weak consumer discretionary spending. However, Walmart has thrived, delivering steady comparable sales growth anchored by its dominant grocery business, as well as new businesses like e-commerce and advertising.

In the first quarter, comparable store sales rose 4.5% in the Walmart U.S. segment, its biggest business, and overall revenue increased 2.5%, or 4% to $165.6 billion. It's also delivering results on the bottom line, as gross margin rose 12 basis points to 24.2%, and adjusted operating income rose 3% to $7.3 billion. While Walmart said it would have to raise prices on some products, it did maintain guidance, calling for revenue growth of 3% to 4% and adjusted earnings per share of $2.50 to $2.60, compared to $2.51 a year ago.

Dollar General, on the other hand, has continued to deliver revenue growth, but profits have suffered due to competition, rising costs, and operational issues. The company hasn't reported first-quarter earnings yet, but in the fourth quarter, revenue rose 4.5% to $10.3 billion on 1.2% in same-store sales.

Operating profit, meanwhile, fell 9% after accounting for a one-time store portfolio optimization, which included the closure of some stores and an impairment charge related to Popshelf, its concept focused on discretionary goods and a younger, higher-income customer base.

For fiscal 2025, management is expecting sales growth of 3.4% to 4.4% and earnings per share of $5.10 to $5.80, compared to $5.92 last year, showing it still has work to do in its turnaround.

Valuation: Walmart versus Dollar General

Walmart shares now trade at a price-to-earnings (P/E) ratio of 38. While that's a premium price, it's one that reflects the tremendous strides the business has made. Dollar General, meanwhile, trades at a P/E ratio of 20, and the stock has soared 33% year to date as investors bet on the recovery. Dollar General also has a dividend yield of 2.3%, compared to just 1% for Walmart.

Which stock is the better buy?

What you choose will likely come down to your investing style. If you're looking for a reliable, all-weather stock, Walmart is hard to beat, though its premium valuation could put a ceiling on the stock for now. Dollar General, meanwhile, has more upside potential, given its turnaround plan, lower valuation, and recent recovery.

Dollar General is clearly the riskier of the two, but I think it's a better bet to outperform over the next three to five years, as it could double if the business gets back on track. Still, Walmart is the better-run business today and buying that stock makes sense for more conservative investors.

Should you invest $1,000 in Walmart right now?

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.