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Investing.com -- Moody’s Ratings has downgraded the senior unsecured notes ratings of Dollar General Corporation (NYSE:DG) to Baa3 from Baa2. Alongside this, the short-term commercial paper program rating has been lowered to Prime-3 from Prime-2. The outlook for the company has been revised to stable from negative.
The downgrade is a reflection of Dollar General’s decreased interest coverage, with EBIT to interest standing at 3.1x, and weakened operating margins. It indicates challenges for the company in improving operating margins and interest coverage in the future due to constrained consumer spending and persistent inflationary pressures. As of January 31, 2025, the leverage on a debt to EBITDA basis was approximately 3.6x and EBIT to interest coverage was around 3.1x.
The Baa3 senior unsecured rating for Dollar General acknowledges its considerable scale, dominant market position as a top-ranking dollar-store chain in the US, excellent liquidity, and moderate financial policy. Despite the challenges, the dollar store sector generally holds a stronger position compared to other retail channels due to its low price points and consumer focus on value.
However, the extreme value sector, which is consumer-centric and has been severely impacted by inflation, is highly price sensitive, making it difficult to raise prices to balance higher costs. The sector also faces a highly competitive operating environment, grappling with increased input costs and shrinkage. Dollar General is currently addressing several operational challenges to enhance earnings and improve credit metrics, a task made difficult due to ongoing inflationary and competitive pressures and its price-sensitive customer base.
In response to these operational challenges, Dollar General has paused share repurchases and utilized excess cash flow to decrease outstanding debt. Despite the debt repayment, the debt/EBITDA ratio remained at 3.6x for the year ending on January 31, 2025. The EBIT/interest also continues to be relatively weak at 3.1x, which partially led the company to seek covenant relief under its bank facility for fiscal years 2024 and 2025. Dollar General’s ratings are also limited by its geographic concentration, with about 60% of its store base located in the Southern US.
The stable outlook is based on the expectation that Dollar General’s ongoing initiatives will enhance operating margins over time and that financial policies will favor further debt reduction over share repurchases while maintaining very good liquidity.
For an upgrade, Dollar General would need a sustained significant improvement in operating performance, margins, and credit metrics, along with very good liquidity. The company’s financial policy and business strategies would also need to support strong credit metrics, including maintaining debt to EBITDA below 3.25 times, EBIT to interest expense above 4.75 times, and EBIT margins at or above 7%.
On the other hand, the company could face downward rating pressure if it fails to successfully address operating difficulties and gradually improve earnings, operating margins, and credit metrics. The ratings could be downgraded if debt to EBITDA remains above 3.75 times or EBIT to interest expense stays below 3.0 times. A further sustained decline in margins or any deterioration in liquidity could also negatively affect the ratings.
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