Dollar General's (NYSE: DG) Q1 results were solid and highlighted the long-term opportunity in this retail stock. However, the guidance was weak, leaving the market in disarray while analysts reset the outlook and lowered their stock price targets. The takeaway is that the 8% decline in the stock price took the market to a critical support target where the bulls fought back. The ensuing action left the market up from the new low, confirming support at the bottom of a trading range, with an outlook for growth and capital returns to support it.
Analysts weren’t thrilled by Dollar General’s results and reset their outlook because of it. The bulk of activity following the report is downward price target revisions that leave the sentient at Hold/Moderate Buy but cut the price target to the $135 to $140 range. Notable details cited in the chatter include strategic gains with new stores, market share, and optimism for margin improvement. Risks cited include the impact of promotions and mix on Q1 results and persistently detrimental shrinkage that may not be controllable.
Dollar General Advances Position in Q1: Q2 Guidance Causes Analyst Reset
Dollar General had a solid quarter in Q1, outperforming the Marketbeat.com consensus estimate on the top and bottom lines. The company reported $9.91 billion in net revenue for a gain of 6.1% that outpaced the consensus by ten basis points. The strength is driven by growth in the consumables segment but slim due to weakness in Home Goods, Seasonal, and Apparel. Comp-store gains are positive at 2.4%, compounded by new store growth. Comp-store growth is driven primarily by traffic offset by a small decline in average ticket amount.
Margin is an area of concern. The company’s margin outperformed but shrank considerably compared to last year. The gross margin fell 145 basis points on shrinkage, mix, and mark-downs, while the SG&A increased wages and incentives to leave operating profit down 26% and GAAP earnings down 30%. So, GAAP earnings of $1.65 are $0.07 better-than-expected but down double-digits compared to the top-line gains despite the 9.5% decline in inventory.
Guidance is solid but tepid relative to the analysts' forecasts and gave no reason to really. The catalyst for the sell-off is a below-consensus outlook for Q2 that leaves the full-year guidance in question. The company reiterated the full-year outlook with revenue up 6% to 6.7%, but the EPS midpoint is below consensus. Given the expectation for strength in the year’s back half, it may be optimistic. The FOMC was expected to loosen economic policy this summer, paving the way for a consumer rebound that may not happen now. The latest data aligns with a hawkish FOMC and no cuts until September or later, if at all this year.
Dollar General Capital Returns Safe in 2024
Dollar General’s capital returns are safe in 2024 but don’t expect share repurchases this year. The company has $1.4 billion left under the current authorization but indicates no buybacks in favor of increasing real estate plans. The company is cutting back on new store openings but accelerating remodels and updates for mature/maturing stores to more efficiently use CAPEX spending. The dividend should continue unabated at the current payout level of $2.36 annually or roughly 1.75%, with the stock trading near $135.
The guidance and analysts' response undercut market support for this stock, but it quickly returned. The plunge and rebound have the market back above $135, and the low set in early May. Assuming the market follows through on this signal, the stock price should move sideways within its established range with a chance of hitting the range’s high end by year-end.
However, the first target for resistance is near a cluster of moving averages that may cap gains. Resistance was strong at $145 leading into the report and may remain until more news emerges. The next visible catalysts are the Q1 report from Dollar Tree (NASDAQ: DLTR), the June FOMC meeting, and Dollar General’s Q2 report in September.
