Dollar General investors have underperformed the S&P 500, raising concerns about the stock’s performance. Despite strong sales and earnings results, a softening earnings outlook has led to a drop in the stock price. This article examines whether Wall Street’s reaction is justified or an overreaction to short-term challenges.
Hits and Misses:
Dollar General’s preliminary earnings announcement shows slightly worse-than-expected Q4 sales trends. Comparable-store sales (comps) increased by 5.7% through early February, driven by higher average spending, but customer traffic declined. Comparatively, industry leader Walmart achieved an 8% comp boost in Q4 due to higher traffic and spending.
Winning Strategy and Growth:
Dollar General reports 11% higher sales in the year, attributed to its successful merchandising and store expansion strategy. CEO Jeff Owen highlights continued market share gains in consumables and non-consumables, reflecting the effectiveness of the company’s approach.
Inventory levels jumped to $6.8 billion from $5.6 billion, driven by cost inflation and expansion into new categories like home furnishings. Increased inventory could create pressure to cut prices if the merchandise doesn’t sell as projected. Gross margin fell slightly to 30.9% of sales from 31.2% a year ago, but cost-cutting measures helped maintain the operating margin at approximately 9%.
Dollar General maintains its initial 2023 outlook, projecting comps growth of 3% to 3.5% on top of the 4.3% increase achieved in 2022. Over 1,000 new store openings are planned, targeting an overall sales rise of about 6%. However, shareholders should expect volatility, as weaker profits are anticipated in the first half of 2023, with a rebound expected during the holiday period.
While Dollar General’s earnings growth will likely slow soon, the potential for further deceleration suggests caution for investors. The company’s optimistic outlook contrasts with peers who have issued wide sales forecasts due to concerns about a potential recession. Considering these factors, investors may favor a more conservative approach to Dollar General’s stock, given the current circumstances.