Dollar General stock

Dollar General Q2 Net Sales Surge Over 24%; Buy with Target Price of $222

Dollar General Corporation, the largest discount retailer in the United States, reported a 24.4% increase in net sales in the second quarter as consumers bought low-priced consumables, seasonal, home products and apparel during the COVID-19 pandemic, sending its shares up over 1% in pre-market trading on Thursday.

The American chain of variety stores said its net sales increased by 24.4% to $8.7 billion in the second quarter of 2020 compared to $7.0 billion in the second quarter of 2019. The net sales increase included positive sales contributions from new stores and growth in same-store sales, modestly offset by the impact of store closures.

Same-store sales increased by 18.8% compared to the second quarter of 2019, driven by an increase in average transaction amount, partially offset by a decline in customer traffic. The Company believes consumer behaviour driven by COVID-19 had a significant positive effect on net sales and same-store sales.

Dollar General said its gross profit as a percentage of net sales was 32.5% in the second quarter of 2020 compared to 30.8% in the second quarter of 2019, an increase of 167 basis points.

On Wednesday, Dollar General shares closed about 3% higher at $204.09, rising over 1% to 206.60 in pre-market trading on Thursday. Also, the stock is up over 30% so far this year.

Executive comments

“We continue to operate from a position of strength and are excited to announce the acceleration of several key strategic initiatives, including the rollout of DG Pickup, DG Fresh, and our Non-Consumables initiative, as well as an increase in our expected number of real estate projects for fiscal 2020,” said Todd Vasos, Dollar General’s chief executive officer.

“Our robust portfolio of initiatives, coupled with our expansive real estate footprint of nearly 17,000 store locations, positions us well to continue delivering value and convenience for our customers while driving sustainable long-term growth and value for our shareholders.”

Dollar General stock forecast

Fifteen analysts forecast the average price in 12 months at $212.79 with a high forecast of $230.00 and a low forecast of $182.00. The average price target represents a 4.26% increase from the last price of $204.09. From those 15 analysts, 13 rated “Buy”, two rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $222 with a high of $290 under a bull-case scenario and $130 under the worst-case scenario. Dollar General had its target price raised by analysts at Telsey Advisory Group to $225 from $210. The firm currently has an “outperform” rating on the stock.

Other equity analysts also recently updated their stock outlook. Goldman Sachs Group set a “buy” rating and a $202.00 price objective on the stock. Oppenheimer increased their price target to $225 from $205.00 and gave the stock an “outperform” rating. At last, Zacks Investment Research upgraded Dollar General from a “hold” rating to a “buy” rating and set their price target to $193.

We think it is good to buy at the current level and target $222 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Analyst view

“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

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.

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.