We reaffirm our long-term Neutral recommendation on Dollar General Corporation (DG) with a target price of $64.00, on balanced risk and reward. The stock currently carries Zacks Rank #3 (Hold).
Why Neutral Recommendation?
Dollar General’s commitment toward better price management, cost containment, private label offering, effective inventory management, merchandise and operational initiatives will likely drive sales and margin growth. Moreover, in order to increase traffic, Dollar General is focusing on both consumables and discretionary categories.
The company has displayed impressive comparable-store sales growth over the years. The company’s comparable-store sales are robust despite unfavorable macroeconomic conditions mainly due to competitive pricing and strategic store expansion plans. Fiscal 2012 marked the 23rd consecutive year of comparable-store sales growth. In the first, second and third quarters of fiscal 2013, the company has posted respectively 2.6%, 5.1% and 4.4% comps growth. For fiscal 2013, Dollar General expects comps to increase by 4% to 4.5%.
Dollar General is currently witnessing steady top and bottom-line growth as evident from its strong third-quarter fiscal 2013 results. The quarterly earnings rose 14.3% to 72 cents a share, while net sales increased 10.5% to $4,381.8 million. This was primarily due to robust performance at the Consumables category. We also remain impressed by the company’s positive earnings surprise history. In the last 4 quarters, Dollar General surpassed the Zacks Consensus Estimate by an average beat of 3.3%.
Looking ahead, Dollar General now projects fiscal 2013 earnings in the range of $3.18 to $3.22 per share. The current Zacks Consensus Estimate dovetails with the higher-end of the guidance range. Total sales are expected to rise by 10% to 10.5% year over year, while comparable-store sales are expected to increase by 4% to 4.5%.
On the flip side, we believe gross margin will likely remain under pressure due to an increase in the sales of lower margin carrying consumables items, and soft sales of discretionary products. Moreover, six less days between Black Friday and Christmas this holiday season, against last year will also impact sales.
Dollar General remains sensitive to macroeconomic factors and competitive pressure. There also remains a fear that the company may face market cannibalization if it expands in the regions where it already exists.
Thus we see that the pros and cons embedded in the stock support our balanced view.
Other Stocks to Consider
The better-ranked stocks in the retail sector include Conns Inc. (CONN) and Hanesbrands Inc. (HBI) carrying a Zacks Rank #1 (Strong Buy) as well as PriceSmart Inc. (PSMT) with a Zacks Rank #2 (Buy).
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