Dollar General Stock’s Discount Is No Bargain as Problems Persist

Dollar General (DG) stock usually isn’t a big mover, but a range of problems caused the share price to plummet on Thursday. Don’t assume there’s a discount or a bargain here, though, even if the Dollar General stock price happens to be lower than it was before. I am neutral on DG stock because the company might have to deal with a number of difficult issues – and not just inflation – for a while.

Dollar General is known for its chain of retail discount-product stores with the big yellow signs. The company’s rival, Dollar Tree (DLTR), has green signs and mostly sells items for $1.25 apiece. In contrast, Dollar General’s items sell for a broad range of prices, including some over $5.

That’s a problem for some families who are struggling to make ends meet. To be honest, I’ve seen cheaper, similar products at Walmart (WMT) or even Target (TGT) sometimes. This wouldn’t be a problem if Dollar General’s results and outlook were stellar, but we’ll let the data speak for itself. In the end, I bet you’ll reconsider any hasty plans to purchase Dollar General stock.

Dollar General: It’s Not Just about Inflation

Sure, inflation is still an issue for many American shoppers today. The U.S. inflation rate is much lower today than it was in June of 2022, when it hit a high of 9.1%. However, this only means that prices are going up less quickly. Hence, inflation is still a problem and it shouldn’t be surprising if some of Dollar General’s customers seek out better deals at Dollar Tree, Walmart, and so on.

Additionally, the company’s second-quarter Fiscal Year 2024 financial report revealed that Dollar General is actually facing several persistent problems.

First, here’s an important statistic. In Q2 of FY2024, Dollar General’s gross profit as a percentage of net sales declined to 30%, versus 31.1% in the second quarter of 2023. The company cited “increased markdowns, increased inventory damages, a greater proportion of sales coming from the consumables category, and increased shrink” as contributing factors to this decline.

This might require some translation/explanation. The “greater proportion of sales coming from the consumables category” suggests that shoppers are leaning more toward cheaper, single-use products, such as food, and away from higher-ticket items. When money is tight, shopper forego unnecessary items, and that’s problematic for Dollar General. 

Furthermore, as for “shrink,” this refers to retail theft or shoplifting. Walmart and other retail chains have been dealing with shrink for a long time, but a gigantic company like Walmart is probably better able to absorb the cost of shoplifting than Dollar General would be.

Another problem is the “softer sales trends” in 2024’s second quarter. Dollar General CEO Todd Vasos stated that they “are partially attributable to a core customer who feels financially constrained.” Thus, inflation remains a core headwind for Dollar General even while the company attempts to combat other issues.

Dollar General Stock Collapses on Earnings Miss, Lowered Outlook

You might be tempted to load up on Dollar General stock because it fell 29% on Thursday, breaking below $90. However, after reviewing the company’s Q2-FY2024 data and full-year outlook, one might conclude that Dollar General shares are “cheap for a reason,” as they say.

Dollar General’s net revenue grew 4.2% year-over-year to $10.2 billion, but this result fell slightly short of the analysts’ consensus estimate of $10.37 billion. Much worse than that, Dollar General’s earnings plummeted 20.2% to $1.70 per share, and Wall Street’s consensus forecast had called for $1.79 per share.

In other words, Wall Street had set a fairly low EPS bar, but Dollar General still missed the mark. It’s no wonder that Vasos stated outright, “[W]e are not satisfied with our financial results.”

Plus, here’s another pain point from Dollar General’s second quarter. The company’s previously provided full-year Fiscal 2024 EPS guidance called for earnings of approximately $6.80 to $7.55 per share. Now, Dollar General only expects to earn approximately $5.50 to $6.20 per share for the full year.

Is Dollar General Stock a Buy, According to Analysts?

On TipRanks, DG comes in as a Moderate Buy based on eight Buys, 10 Holds, and a Sell rating assigned by analysts in the past three months. The average Dollar General stock price target is $146.24, implying 64.4% upside potential.

If you’re wondering which analyst you should follow if you want to buy and sell DG stock, the most accurate analyst covering the stock (on a one-year timeframe) is Michael Lasser of UBS (UBS), with an average return of 10.91% per rating and a 76% success rate.

Conclusion: Should You Consider Dollar General Stock?

Oftentimes, if a stock plunges by 25% or more in a single day, I’ll flex my contrarian muscles and pound the table. There will be no table-pounding today, however. Dollar General admitted that it has an array of problems to deal with, and it’s unclear how long it will take for those problems to be resolved. 

Besides, Dollar General’s bottom-line results and forward guidance don’t bode well for the company in the near term. Maybe, inflation and shoplifting will subside in the coming quarters and Dollar General’s outlook can then improve. Yet, those changes remain to be seen.

Therefore, I’m taking a neutral position and would not consider purchasing DG stock, even at its currently-reduced price.

Disclosure