Dollar General Has Significant Organic Growth Potential In New And Existing Markets, Says Wedbush


In a research note published yesterday, Wedbush analyst Joan Storms maintained an Outperform rating on Dollar General Corp (NYSE: DG) with a $68 price target, following the release of the company’s second quarter results. The company had an EPS of $0.83, which was in line with consensus, however the company still experienced a shortfall in sales in the second quarter. The company had sales of $4.72 billion.

Storms wrote, “In Q2, the sales shortfall was attributed to the consumer as well as the roll-out of the new affordability initiatives. We see 2H comps accelerating driven by increased volume of affordability initiatives, private label, the home and apparel categories, and the digital coupon initiative as well as less incremental consumer worries and promotions as we anniversary last year’s concerns about a government shutdown, lower unemployment benefits and reduced SNAP payments. As such, Q3 is off to a good start with a strong back-to-school season.” Storms continued, “We expect benefits to accrue and help comps accelerate in 2H from ongoing merchandising initiatives including more private-brand items, repackaged private-brand merchandise, and expanded offerings at the $1 and $1-$5 price points, better performance of non-discretionary such as home and apparel, as well as the rollout of digital coupons, 7% square footage growth, and remodels, all of which should contribute to stronger sales growth. Gross margins should also see relief in 2H as the company anniversaries the roll-out of tobacco from last year, shrink stabilizes, sourcing benefits continue, and private label penetration expands. Longer-term, the company still has significant organic growth potential including its newer DG Market and DG Plus concepts. The company faces some SG&A headwinds in 2014, but these should be temporary and normalize into 2015. Longer term, operating margin growth opportunities include gross margin expansion opportunities mentioned above, as well as leverage of SG&A. We believe the company still has significant organic growth potential in new and existing markets, as well as through its newer DG Market and DG Plus concepts.”

Storms added, “Given the more than 10% increase in share price since DG made the offer to acquire FDO, which was subsequently rejected, long- term holders may want to opportunistically take some profits given the uncertainty of who will win the battle for FDO and at what price. Nevertheless, the company continues to execute on growth and profitability initiatives, despite ongoing pressures on its core lower income customer. We expect benefits to accrue and help comps accelerate in 2H from ongoing merchandising initiatives including more private-brand items, repackaged private-brand merchandise, and expanded offerings at the $1 and $1-$5 price points, better performance of non-discretionary such as home and apparel, as well as the rollout of digital coupons, 7% square footage growth, and remodels, all of which should contribute to stronger sales growth. Gross margins should also see relief in 2H as the company anniversaries the roll-out of tobacco from last year, shrink stabilizes, sourcing benefits continue, and private label penetration expands. Longer-term, the company still has significant organic growth potential including its newer DG Market and DG Plus concepts.”

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Joan Storms has a total average return of 0.4% and a 53.8% success rate. Storms has a 14.7% average return when recommending DG, and is ranked #2174 out of 3266 analysts.

 

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