Tuesday, Citi reiterated a Sell rating on Dollar General (NYSE:DG), with a price target of $73.00. The firm's analysis suggests that Dollar General's third-quarter earnings per share (EPS) will be $0.83, falling short of the consensus estimate of $0.95. The expected comparable sales growth is in line with consensus at +1.0%, as the company did not provide third-quarter guidance.
Citi predicts a gross margin decline of 100 basis points, which is a continuation of the trend seen in the second quarter, where gross margin fell by 110 basis points. This is a more pessimistic outlook compared to the consensus estimate of a 50 basis point decline. The firm attributes the expected margin pressure to pricing actions taken by Dollar General to remain competitive, which may not be fully offset by improvements in shrink, an area where Citi does not anticipate benefits in the third quarter.
The analysis points to Walmart's (NYSE:WMT) continued market share gains across various income groups as a significant factor impacting Dollar General's performance. Walmart's appeal to value-conscious consumers, including those from higher income demographics who might have otherwise shopped at Dollar General, is believed to be a key driver of this trend. Additionally, early fourth-quarter data indicates weakening credit card usage and foot traffic for Dollar General.
Citi expects Dollar General's management to lower their fiscal year 2024 EPS guidance from the range of $5.50-6.20 to $5.50-6.00. The firm maintains its Sell rating on Dollar General's shares, citing the ongoing market share gains by Walmart as a persistent challenge that is likely to continue affecting Dollar General's future performance.
In other recent news, Dollar General has reported a 4.2% increase in net sales, totaling $10.2 billion for the second quarter. However, the company plans to increase markdown investments due to concerns over financial performance, which is being impacted by inflation and employment issues faced by its core customers. In a strategic move, the company has replaced its previous credit agreement with a substantial $2.375 billion unsecured revolving credit facility, available until September 3, 2029.
In a significant development, Elf Beauty has partnered with Dollar General to extend its affordable cosmetics range to the retailer's customer base, primarily families with annual incomes less than $35,000. This collaboration aims to boost Elf's accessibility to lower-income consumers, especially in underserved rural communities.
On the analyst front, Goldman Sachs (NYSE:GS) has reaffirmed its Buy rating on Dollar General, while Raymond (NS:RYMD) James reduced its stock price target, maintaining an Outperform rating. Evercore ISI, however, has added the retailer to its Tactical Asset Picker Underperform list, anticipating a possible decline in Dollar General's stock price.
Lastly, Dollar General has cautioned shareholders against an unsolicited mini-tender offer from TRC Capital Investment Corporation, advising them to consult with financial advisors and exercise caution.
InvestingPro Insights
Recent InvestingPro data provides additional context to Citi's analysis of Dollar General (NYSE:DG). The company's P/E ratio of 11.9 suggests it's trading at a relatively low earnings multiple, which aligns with the recent stock price decline. This is further emphasized by the fact that Dollar General is trading near its 52-week low, with a significant 37.97% price drop over the last three months.
Despite these challenges, InvestingPro Tips highlight that Dollar General remains a prominent player in the Consumer Staples Distribution & Retail industry. The company's liquid assets exceed short-term obligations, indicating a stable financial position in the near term. However, the expectation that net income will drop this year corroborates Citi's cautious outlook.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips that could provide valuable insights into Dollar General's financial health and market position.
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