We initiated our coverage on
Dollar General Corporation
) with a Neutral recommendation and a target price of $59.00.
This was based on the company's better-than-expected results and
its prudent efforts to drive growth. However, the stock remains
vulnerable to a gross margin pressure and macroeconomic
Why Neutral Recommendation?
Dollar General's commitment toward better price management, cost
containment, private label offering, effective inventory
management, merchandise and operational initiatives will likely
drive sales and margin growth.
Further, this Zacks Rank #2 (Buy) stock has displayed impressive
comparable-store sales growth over the years. The company's
comparable-store sales remained robust despite unfavorable
macroeconomic conditions mainly due to competitive pricing and
attractive store expansion strategies, including remodeling and
relocations. Fiscal 2012 marked the 23rd consecutive year of
comparable-store sales growth
Moreover, Dollar General has been actively managing its cash
flows and returning much of its free cash to shareholders through
share repurchases. The company has also been making prudent
investments related to store infrastructure; store openings,
expansions and relocations; and improvement of distribution
centers in to increase revenues.
Dollar General is currently witnessing steady top and bottom-line
growth as evident from its strong second-quarter fiscal 2013
results. The quarterly earnings rose 11.6% to 77 cents a share,
while net sales increased 11.3% to $4,394.7 million. This was
primarily due to robust performance at the Consumables
We also remain impressed by the company's positive earnings
surprise history. In the last 10 quarters, Dollar General
surpassed the Zacks Consensus Estimate 8 times with an average
beat of 4.2%.
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Looking ahead, Dollar General continues to project fiscal 2013
earnings in the range of $3.15 to $3.22 per share. The current
Zacks Consensus Estimate for the year is $3.23 per share. Total
sales are expected to rise by 10% to 11% year over year, while
same-store sales are expected to increase by 4% to 5%.
On the flip side, we remain concerned about the increase in gross
margin pressure due to rise in sales of low margin carrying
products and higher inventory shrinkage. For fiscal 2013,
management expects gross margin to remain under pressure and to
contract 90 basis points when compared with the prior year.
Moreover, the stock remains sensitive to macroeconomic factors
and competitive pressure. The company could face market
cannibalization if it further expands in the geographies where it
Other Stocks to Consider
Apart from Dollar General, other stocks worth a look in the
retail sector include
Citi Trends, Inc.
). All these carry a Zacks Rank #1 (Strong Buy).