We reaffirm our long-term Neutral recommendation on
Dollar General Corporation
) with a target price of $64.00, on balanced risk and reward. The
stock currently carries Zacks Rank #3 (Hold).
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. Moreover, in order to increase
traffic, Dollar General is focusing on both consumables and
The company has displayed impressive comparable-store sales
growth over the years. The company's comparable-store sales are
robust despite unfavorable macroeconomic conditions mainly due to
competitive pricing and strategic store expansion plans. Fiscal
2012 marked the 23
consecutive year of comparable-store sales growth. In the first,
second and third quarters of fiscal 2013, the company has posted
respectively 2.6%, 5.1% and 4.4% comps growth. For fiscal 2013,
Dollar General expects comps to increase by 4% to 4.5%.
Dollar General is currently witnessing steady top and
bottom-line growth as evident from its strong third-quarter
fiscal 2013 results. The quarterly earnings rose 14.3% to 72
cents a share, while net sales increased 10.5% to $4,381.8
million. This was primarily due to robust performance at the
Consumables category. We also remain impressed by the company's
positive earnings surprise history. In the last 4 quarters,
Dollar General surpassed the Zacks Consensus Estimate by an
average beat of 3.3%.
Looking ahead, Dollar General now projects fiscal 2013
earnings in the range of $3.18 to $3.22 per share. The current
Zacks Consensus Estimate dovetails with the higher-end of the
guidance range. Total sales are expected to rise by 10% to 10.5%
year over year, while comparable-store sales are expected to
increase by 4% to 4.5%.
On the flip side, we believe gross margin will likely remain
under pressure due to an increase in the sales of lower margin
carrying consumables items, and soft sales of discretionary
products. Moreover, six less days between Black Friday and
Christmas this holiday season, against last year will also impact
Dollar General remains sensitive to macroeconomic factors and
competitive pressure. There also remains a fear that the company
may face market cannibalization if it expands in the regions
where it already exists.
Thus we see that the pros and cons embedded in the stock
support our balanced view.
Other Stocks to Consider
The better-ranked stocks in the retail sector include
) carrying a Zacks Rank #1 (Strong Buy) as well as
) with a Zacks Rank #2 (Buy).
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