Dollar General Beats Earnings Estimates; Net Sales Surge Over 17%

Dollar General Corporation, the largest discount retailer in the United States, reported better-than-expected earnings in the third quarter with net sales surging over 17% as consumers continued to buy low-priced consumables, seasonal, home products and apparel during the COVID-19 pandemic.

The American chain of variety stores said its net sales increased 17.3% to $8.2 billion in the third quarter of 2020 compared to $7.0 billion a year ago. Same-store sales increased by 12.2% compared to the third quarter of 2019, driven by an increase in average transaction amount, partially offset by a decline in customer traffic. Same-store sales increased in each of the consumables, seasonal, home products and apparel categories, with the largest percentage increase in the home products category.

The Company reported net income of $574.3 million for the third quarter of 2020, an increase of 57.1% compared to $365.6 million in the third quarter of 2019. Diluted EPS increased 62.7% to $2.31 for the third quarter of 2020, beating market expectations of $2.01, up compared to diluted EPS of $1.42 in the same period last year.

Despite that Dollar General’s shares dipped 1.74% to $213.75 in pre-market trading on Thursday. However, the stock is up about 40% so far this year.

Dollar General Stock Price Forecast

Eight equity analysts forecast the average price in 12 months at $247.00 with a high forecast of $260.00 and a low forecast of $232.00. The average price target represents a 13.54% increase from the last price of $217.54. All those eight analysts rated “Buy”, according to Tipranks.

Morgan Stanley gave the base target price of $240 with a high of $315 under a bull-case scenario and $150 under the worst-case scenario. The firm currently has an “Overweight” rating on the discount retailer’s stock. Telsey Advisory Group raised their stock price forecast to $245 from $240.

Several other analysts have also upgraded their stock outlook. Jefferies raised the target price to $260 from $246. Dollar General had its price target lifted by JP Morgan to $250 from $230. JP Morgan currently has an overweight rating on the stock. Bank of America lifted their target price to $229 from $220 and gave the company a buy rating.

Analyst Comments

“Dollar General (DG) is a best in class operator offering a rare combination of 1) consistent, high-quality top-and bottom-line results; 2) visible store growth; and 3) a shareholder-friendly capital allocation policy. Recent high-quality results add more confidence to the 10% L-T EPS growth algorithm, ramping top-line initiatives appear sustainable, and we see underappreciated margin upside from the rollout of Fresh self-distribution,” said Simeon Gutman, equity analyst at Morgan Stanley.

“We think DG’s multiple, while elevated, is justified given consistent execution and potential for significant earnings upside especially amidst COVID-19 disruption and a potential recession,” Gutman added.

Upside and Downside Risks

Risks to Upside: 1) COVID-19/recession drives greater middle/upper income spend to Dollar Stores. 2) Margin upside from DG Fresh and Fast Track initiatives. 3) Accelerating contribution from new store concepts and remodel initiatives – highlighted by Morgan Stanley.

Risks to Downside: 1) COVID-19 fails to drive comp uplift and pressures expenses/margins. 2) Increased competitive threat from DLTR/FDO/WMT. 3) Difficulties continuing expansion into productive new locations.

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