Dollar General Earnings: Softness Reflects Lower-Income Patrons’ Struggles Rather Than Firm’s Standing

Our $211 per share valuation of narrow-moat Dollar General DG should fall by a high-single-digit percentage after it announced soft first-quarter earnings and slashed guidance, with the economic environment weighing on results. Shoppers’ pullback on discretionary spending continued at a faster pace than anticipated, with Dollar General’s same-store sales performance sharply bifurcated (4.3% growth in consumables, 8.5% decline in nonconsumables, 1.6% overall growth). With the firm’s underperformance linked to transitory macroeconomic factors, our long-term forecast should not change much (mid-single-digit percentage yearly top-line growth, high-single-digit operating margins, on average). We attribute the difference between our more muted take on the announcement and the shares’ roughly 20% trading price plunge to our focus on the company’s longer-term dynamics. We believe the shares are modestly attractive for long-term investors comfortable with the near-term volatility.

The soft sales performance (we had expected 4% same-store sales growth) and mix shift as consumers shunned more lucrative non-consumable categories weighed on profitability, with the firm’s 7.9% operating margin trailing both our 8.3% estimate and the chain’s 8.5% mark in fiscal 2022′s opening stanza. Management cut full-year guidance in response to the lackluster quarter and overall economic environment, now targeting diluted EPS that is 0%-8% lower than last year’s $10.68 (previously estimating 4-6% growth). Our 7% growth expectation should fall into the new range.

Although Dollar General remains well positioned for a recession, factors such as lower-than-expected tax refunds—which are often used for discretionary items—and reduced welfare payments led to sharper retrenchment among lower-income consumers than we had expected. As mix stabilizes and Dollar General refocuses on the underserved rural areas that are at its core, we believe the chain should capitalize on consumers’ focus on value.