BofA upgrades Dollar General on improved visibility on retailer’s recovery path

Investing.com -- Bank of America upgraded Dollar General (NYSE:DG) to "Overweight" from "Marketweight," saying it sees improved visibility on the retailer’s recovery path.

Dollar General is expected to stabilize EBITDA in the second half of 2025 and resume margin growth in fiscal 2026 on the back of simplified execution, increasing trade-in behavior, and store remodels as key factors supporting comparable sales and margin recovery.

The retailer’s financial strategy remains defensive, focusing on debt repayment with no share buybacks planned until leverage approaches three times EBITDA.

BofA noted that the company’s low-BBB credit rating was an overdue clearing event and described its tempered fiscal 2025 guidance as "sensible," given uneven first-half comparisons.

Dollar General’s core low-income customers remain under pressure but are stabilizing as they adjust to persistent inflation, BofA said.

More notably, the retailer is seeing larger basket sizes and increased unit sales, reflecting trade-in behavior from middle-income consumers facing maxed-out credit card spending, softening job growth, and rising household expenses.

Trade-in dynamics, value offerings, and new products are expected to fuel sales growth in fiscal 2025. The company’s store refresh initiatives, including Project Elevate and Project Renovate, are delivering mid-single-digit percentage lifts in sales.

Additionally, non-consumables such as beauty products and home goods are providing higher-margin opportunities.

BofA also highlighted improvements in inventory management, media monetization, and sales mix as supporting margin recovery to the 6-7% range.

While store conditions and management turnover have been challenges, operational efficiencies and store investments should alleviate these issues by the end of fiscal 2025.

Dollar General is prioritizing store renovations over new builds, given rising construction costs and competitive pressures.

With 4,250 remodels planned, the company aims to improve store conditions while maintaining investment-grade ratings.

BofA does not expect share repurchases before fiscal 2027, as the retailer focuses on reducing leverage, including a $500 million debt repayment scheduled for April 29.

Shares of Dollar General have upside potential of 20-25 basis points relative to BBB-rated retail peers, including Kroger (NYSE:KR), Dollar Tree (NASDAQ:DLTR), Lowe’s (NYSE:LOW), and AutoZone (NYSE:AZO), according to BofA.