Dollar General Shares Slump Over 6% as Earnings, Outlook Disappoints

Dollar General’s shares slumped over 6% on Thursday after the discount retailer reported lower-than-expected earnings in the fourth quarter and gave a downbeat outlook for the fiscal year 2021 as vaccine rollouts and opening up of the economy would hurt sales.

The company, which offers merchandise including consumables, seasonal, home products and apparel at everyday low prices, said its net sales increased 17.6% to $8.4 billion in the fourth quarter of 2020 compared to $7.2 billion in the fourth quarter of 2019, also beating the Wall Street expectations of $8 billion.

Although diluted EPS increased 24.8% to $2.62 for the fourth quarter of 2020 compared to diluted EPS of $2.10 in the fourth quarter of 2019, it missed the market consensus estimates of $2.72 per share.

For the fiscal year 2021, which ends on January 28, 2022, Dollar General forecasts net sales in the range of a 2% decline to flat and same-store sales decline of 4% to 6%, which reflects the growth of approximately 10% to 12% on a two-year stack basis.

Diluted EPS is expected to be in the range of $8.80 to $9.50, which reflects a compound annual growth rate between 15% and 20% (or between 14% and 19% on an adjusted basis) over a two-year period. That is lower than the analysts’ expectations of $10.08 per share.

Following this release, Dollar General shares, which surged about 35% in 2020, slumped over 6% on Thursday.

Analyst Comments

“DG’s Q4 results and ’21 guide were a little light. But, like other Retail COVID-19 beneficiaries, DG was already in the penalty box. Comps may be bottoming, which combined with healthy underlying trends and a now cheaper multiple, makes for a good 2H setup,” noted Simeon Gutman, equity analyst at Morgan Stanley.

“That said, mega-cap COVID-19 beneficiaries probably remain rangebound in the early part of 2021. The reality is there probably wasn’t much DG could have said to change the trajectory of the stock; we have seen this story several times in Q4 EPS from other COVID-19 beneficiaries including COST, WMT, TGT, HD and LOW. But with DG shares down 11% year to date (vs. S&P 500 +6%) and a possibly conservative ’21 guide, investors with long-term time horizons could use this opportunity to slowly build to positions (assuming the constructs of gross margin expansion remain in place).”

Dollar General Stock Price Forecast

Eight analysts who offered stock ratings for Dollar General in the last three months forecast the average price in 12 months of $241.88 with a high forecast of $260.00 and a low forecast of $215.00.

The average price target represents a 36.24% increase from the last price of $177.54. Of those eight analysts, seven rated “Buy”, one rated “Hold” while none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $245 with a high of $315 under a bull scenario and $155 under the worst-case scenario. The firm gave an “Overweight” rating on the discount retailer’s stock.

Several other analysts have also updated their stock outlook. Dollar General had its target price reduced by Oppenheimer to $225 from $240. They currently have an outperform rating on the stock. Loop Capital upgraded to a buy from hold and set a $260 price target. Deutsche Bank raised to a buy rating from hold and lifted their price objective to $241 from $214.

“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 rollout of Fresh self-distribution,” Morgan Stanley’s Gutman added.

“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.”

Check out FX Empire’s earnings calendar