Can Dollar General Sustain Margin Expansion in Fiscal 2026?

Dollar General CorporationDG delivered sharp margin expansion in the fourth quarter of fiscal 2025, but the bigger question is how much of that improvement can carry into fiscal 2026. Gross margin rose 105 basis points to 30.4% in the quarter, while operating margin expanded 270 basis points to 5.6%. For the full year, gross margin improved 107 basis points to 30.7%, showing that the gains were not limited to a single quarter. Management attributed the improvement primarily to lower shrink, higher inventory markups and reduced damages, partially offset by a higher LIFO provision.

A key takeaway is that margin expansion was largely operational rather than one-time in nature. Shrink mitigation remained the standout driver, with a 62-basis-point improvement in the fourth quarter and an 80-basis-point reduction for the full year. 

Management expects margin gains to continue in fiscal 2026, though at a more moderate pace, as the company laps substantial prior-year improvements. We expect gross margin to improve 40 basis points in fiscal 2026. Management also warned about modest SG&A deleverage tied to ongoing investments in remodels and IT modernization. External factors such as tariffs, fuel costs and inflation also remain key variables.

The roadmap for continued margin growth centers on a multi-year strategy to reach a target operating margin of 6% to 7%. Central to this plan is the continued mitigation of shrink and damages, which are projected to contribute an additional 50 basis points of gross margin expansion over the next three to four years. 

Dollar General is pivoting toward higher-margin revenue streams to bolster profitability. The DG Media Network is expected to provide approximately 50 basis points of margin improvement over the next three to four years. A strategic shift to increase non-consumable sales penetration to 20% by 2029 is viewed as a critical lever for long-term margin health.

What the Latest Metrics Say About Dollar General

Dollar General stock has advanced 20% over the past six months compared with the industry’s rise of 13.4%. While DG has outperformed Costco Wholesale CorporationCOST, it has underperformed Target CorporationTGT. During the same period, Target shares have rallied 35.4%, while Costco has posted a modest gain of 6.6%.
 

Image Source: Zacks Investment Research

Dollar General’s forward 12-month price-to-earnings ratio of 17.04 reflects a lower valuation compared to the industry’s average of 33.09. DG carries a Value Score of B. DG is trading at a premium to Target (with a forward 12-month P/E ratio of 15.70) but at a discount to Costco (46.30). 
 

Image Source: Zacks Investment Research

The Zacks Consensus Estimate for Dollar General’s current financial-year sales and earnings per share implies year-over-year growth of 4% and 6.3%, respectively. For the next fiscal year, the consensus estimate indicates a 4.1% rise in sales and 9.8% growth in earnings.
 

Image Source: Zacks Investment Research

Dollar General currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Radical New Technology Could Hand Investors Huge Gains

Quantum Computing is the next technological revolution, and it could be even more advanced than AI.

While some believed the technology was years away, it is already present and moving fast. Large hyperscalers, such as Microsoft, Google, Amazon, Oracle, and even Meta and Tesla, are scrambling to integrate quantum computing into their infrastructure.

Senior Stock Strategist Kevin Cook reveals 7 carefully selected stocks poised to dominate the quantum computing landscape in his report, Beyond AI: The Quantum Leap in Computing Power.

Kevin was among the early experts who recognized NVIDIA's enormous potential back in 2016. Now, he has keyed in on what could be "the next big thing" in quantum computing supremacy. Today, you have a rare chance to position your portfolio at the forefront of this opportunity.

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research