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On Thursday, Dollar General's stock (NYSE:DG) was downgraded from Buy to Hold by CFRA, with the firm also reducing the price target to $103 from $169. This change comes in response to the retailer's second-quarter earnings per share (EPS) of $1.70, which fell short of expectations by $0.09 and marked a 20% year-over-year decline. Dollar General's same-store sales growth stood at 0.5%, missing the anticipated 2.1% consensus.
The downgrade follows Dollar General's decision to lower its full-year financial forecast, attributing the move to increased financial pressure on its core demographic of low-income consumers.
This adjustment reflects a broader challenge for dollar stores, as they face competition from larger retailers like Walmart (NYSE:WMT) that are enhancing their omni-channel capabilities and utilizing various strategies to maintain low prices.
CFRA's revised 12-month price target is based on a 15x multiple of the forecasted fiscal year 2026 EPS of $6.87, which has been reduced from the previous estimate of $8.47. The firm also lowered its projection for fiscal year 2025 to $6.19 from $7.04. The new target contrasts with Dollar General's historical average price-to-earnings ratio of 19x.
The report from CFRA indicates skepticism about Dollar General's ability to achieve operating margins above 6% by fiscal year 2026. The firm anticipates operating margins will drop to 5.0% in fiscal year 2025 and slightly recover to 5.2% in fiscal year 2026. These figures are notably lower than Dollar General's pre-pandemic margins, which ranged between 7% and 8%.
CFRA has highlighted the necessity for Dollar General to reinvest in various aspects of its business, including store remodels, price reductions, inventory markdowns, and wage increases.
These investments are seen as essential for the retailer to stay competitive, yet they may hinder the company's ability to return to its higher historical operating margins.
In other recent news, Dollar General Corporation (NYSE:DG) experienced a miss on its earnings per share (EPS) for the second quarter of the financial year 2025, leading to a downward revision of its full-year EPS forecast by 18-19%.
Despite this, BMO Capital maintained its Market Perform rating for the company with a steady price target of $130.00. Truist Securities, Loop Capital, and Argus also revised Dollar General's price target, citing various factors such as weaker sales and a challenging operational landscape.
In terms of board changes, Dollar General expanded its board of directors with the appointment of Kamy Scarlett, a senior executive at Best Buy Co (NYSE:BBY)., Inc. Furthermore, the company reached a $12 million settlement with the U.S. Department of Labor over alleged safety violations, committing to implementing measures to enhance workplace safety across its U.S. stores.
These recent developments come amidst a range of analyst updates. Goldman Sachs suggested buying Dollar General calls, anticipating the retailer's appeal to budget-conscious consumers. Telsey Advisory Group maintained an Outperform rating on Dollar General, forecasting a sequential improvement for the retailer throughout 2024.
InvestingPro Insights
As Dollar General (NYSE:DG) navigates a challenging retail environment, real-time data from InvestingPro offers additional context. With a market capitalization of $19.46 billion and a P/E ratio sitting at 12.78, the company's valuation reflects a mix of investor sentiment and financial performance. The adjusted P/E ratio for the last twelve months as of Q1 2025 stands at 17.97, providing a nuanced view of the company's earnings relative to its share price over a more recent period.
InvestingPro Tips suggest that Dollar General is a prominent player in the Consumer Staples Distribution & Retail industry, with liquid assets that exceed short-term obligations. This liquidity is a positive sign, indicating that the company can cover its immediate financial responsibilities. Additionally, the stock is trading near its 52-week low, which could present a potential entry point for investors, considering analysts predict the company will be profitable this year and it has been profitable over the last twelve months.
These insights, alongside the 145 USD fair value estimated by analysts and the InvestingPro fair value of 122.53 USD, provide a fuller picture that may be beneficial for investors considering Dollar General's stock. It's worth mentioning that these are just a few of the many InvestingPro Tips available; for those seeking more in-depth analysis, there are additional tips listed on the InvestingPro platform.
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