No. of Recommendations: 4
Dollar General struggled during the
first half of fiscal 2023. Earnings
declined 17% versus the comparable yearago period, due to a combination of
weakening consumer spending patterns,
increased cost pressures tied to borrowing
and retail labor, and elevated levels of
shrink (an industry term that often refers
to reduced inventory due to theft). While
positive sales contributions from new
stores have helped drive top-line improvement of 5% through the first six months,
overall, it has been a highly disappointing
year for Dollar General thus far.
Bottom-line comparisons ought to
remain difficult in the second half.
Leadership recently indicated that it
would be making significant investments
in targeted areas (namely retail labor) to
improve the in-store experience in the
third and fourth quarters. Needless to say,
this is likely to put further pressure on
what was already a challenging earnings
growth environment for the retailer. To reflect this increased spending, it now expects its earnings to drop 22% to 34% in
fiscal 2023, versus its previous forecast of
flat to an 8% decline. It also cut its top
No. of Recommendations: 0
line growth outlook to 1.3% to 3.3%, from
3.5% to 5%, owing in part to the aforementioned weakening in consumer spending.
We have made substantial cuts to our
estimates for this year and next. Dollar
General has missed consensus expectations in back-to-back quarters, as persistent macroeconomic headwinds are clearly
taking a toll on the discount retailer's core
budget-conscious consumer base. As a result, we have reduced our fiscal 2023 earnings call to $7.80 a share (from $10.20),
implying a year-over-year pullback of 27%.
While we believe the company is still
poised for some recovery in fiscal 2024, we
have also cut next year's estimate to $8.60
a share (previously $11.20).
The stock holds a Below Average (4)
rank for Timeliness. DG has shed 40%
in value since our July report, and is now
showing a loss of about 60% on the year.
While we believe the equity could be nearing oversold territory, near-term investors
may want to wait for signs of sustainable
improvement before initiating a position
here. Our long-term projections suggest
wide recovery potential out to 2026-2028.
Michael Ratty October 20, 2023
