Dollar General's RS Rating Surge: Technical Momentum vs. Fundamental Crossroads

Dollar General (DG) has emerged as a paradoxical investment opportunity: its Relative Strength (RS) Rating recently surged from 69 to 78—a 14% improvement—signaling renewed price momentum. Yet its Q3 2024 earnings dropped 32% to $1.1 billion, underscoring persistent margin pressures. This juxtaposition raises a critical question: Does DG’s technical rebound reflect a sustainable turnaround, or is it a fleeting market reaction? For investors, the answer hinges on weighing its aggressive store expansion, strategic pivots, and competitive positioning against peers like Costco (COST), while monitoring near-term risks like Q1 2025 earnings pressure. Here’s why dips near key support levels could present a tactical buy.

The RS Rating Upgrade: A Technical Green Light?

The RS Rating, which measures a stock’s performance relative to peers over 52 weeks, has historically flagged breakout candidates. DG’s jump to 78 (and subsequent rise to 83) suggests institutional interest in its price action, even if it hasn’t yet breached the coveted 80+ “buy zone.” This momentum aligns with its +5% sales growth in Q3 2024 and a +1.4% same-store sales increase, both of which signal demand resilience in its core rural markets.

However, skeptics note that RS Ratings alone don’t guarantee success. DG’s -32% net income drop—driven by hurricane-related losses and inventory markdowns—reminds investors that fundamentals still matter. The challenge is determining whether DG’s operational shifts can stabilize margins and justify its $19.3 billion market cap, now less than 5% of Costco’s valuation.

Strategic Positioning: Expansion Meets Efficiency

DG’s growth strategy is twofold:
1. Aggressive Store Growth with Smarter Mixes:
- Plans to open 725 new stores in 2025, prioritizing larger formats (8,500–10,640 sq ft) in rural areas. These stores will expand fresh produce, health products, and cooler sections, aiming to boost sales per square foot by 15–20% versus older locations.
- Simultaneously, it will close 141 underperforming stores, focusing resources on high-potential markets. Net growth remains robust, with ~600 new stores expected by year-end.

1. Cost Optimization:
2. 60 corporate layoffs in early 2025 streamlined operations, while a new distribution center aims to reduce logistics costs by 10%.
3. “Project Elevate” targets 2,250 stores with light remodels (e.g., layout upgrades, SKU reductions), boosting comparable sales by 3–5%. Full-scale renovations (2,000 stores) could add 6–8% sales lifts.

These moves address two critical pain points: rising occupancy costs (up 7% in 2024) and inventory shrinkage (driven by theft and damage). By sharpening its focus on rural dominance and operational efficiency, DG aims to replicate its $40.6 billion 2024 revenue—outpacing Dollar Tree and Family Dollar combined.

Competitive Edge: DG vs. Costco

While Costco’s membership model delivers 78.4 million paid households and +7% sales growth in Q2 2025, DG’s strengths lie elsewhere:
- Rural Market Dominance: DG operates ~20,500 stores, serving 75% of U.S. residents within five miles. This density provides a defensible moat against online competitors.
- Affordability: Its average transaction size is $15–$20, far below Costco’s $100+ bulk purchases. As inflation squeezes low-income households, DG’s value-driven offerings (e.g., +5% sales growth in food categories) become a lifeline.
- Digital Integration: Partnerships like DoorDash delivery (now in 16,000 stores) and its DG Delivery pilot (75 stores, expanding to 10,000) aim to replicate Amazon’s convenience while maintaining affordability.

Analysts at Zacks note DG’s “Hold” rating reflects near-term EPS headwinds, but its 2026 targets—2–3% same-store sales growth and 6–7% operating margins—suggest a path to recovery.

Technical Setup: Buy on Dips Near Key Supports

The RS Rating upgrade to 78 has fueled a 12% rally from $85 to $94 in May 2025. However, the stock faces resistance at $100, where it failed in early 2024. For tactical buyers, the RS Rating’s improvement to 83 (as of May 15) and bullish MACD crossover suggest momentum is intact.

Key Support Levels to Watch:
1. $85.83 (100-Day EMA): A break here could trigger a 10–15% correction, testing the $84.44 200-Day EMA.
2. $83.88 (Classic Pivot S3): A final line of defense before a deeper decline toward $71.36, the Fibonacci-derived stop-loss level from trader setups.

Investors should consider buying at $88–$90, with a stop below $85. A close above $96.88 (weekly resistance) would validate DG’s RS Rating-driven momentum and set sights on $120—the target of its “cup and handle” formation.

Risks to the Bull Case

1. Q1 2025 Earnings Pressure: DG’s EPS is projected to drop 6.1% YoY in fiscal 2025 due to remodeling costs and labor expenses. A miss could reignite selling.
2. Inflation and Tariffs: Rising input costs threaten its 3.5–4% sales growth guidance. DG’s plan to absorb tariffs—while possible—adds uncertainty.
3. Popshelf’s Struggles: The closure of 45 Popshelf stores highlights execution risks in premium formats.

Conclusion: A Tactical Buy on Dips, With Caution

Dollar General’s RS Rating surge and strategic moves suggest a turning point, but investors must balance optimism with patience. The stock’s technical rebound, rural dominance, and cost controls make it a high-potential play at $88–$90, with $85.83 as a critical support floor. While near-term earnings risks loom, DG’s long-term growth trajectory—driven by 21,000+ stores by 2025 and digital expansion—justifies a tactical position. For those willing to navigate volatility, DG offers a compelling risk/reward ratio at current levels.

Act fast—technical momentum fades, and DG’s next earnings report could redefine the narrative.