Discount retailers are mainstay stocks that investors like to lean on when times get tight. Dollar General (NYSE: DG) and its competitors should thrive during a recession as consumers tighten their belts and cut costs.
Though the market has bounced back after a tough 2022, retailers as a whole aren’t enjoying the same recovery. Everything from continued inflation and unchecked shoplifting to concerns about student loan repayment has kept the sector under pressure, and DG is no exception. The stock is down around 58% year-to-date.
On the surface, the sharp decline doesn’t make sense. Discount retailers are supposed to be the go-to for shoppers at times like these, and Dollar General just posted a 3% increase in sales in the 2nd quarter of 2023.
After years of steady increases, DG shares are now trading below where they were 5 years ago, which is also 60% below its 52-week high of $261.59.
So is Dollar General stock undervalued?
Why Is Dollar General Stock So Low?
The main reason the stock has gone so low is because Dollar General failed to report numbers in line with analysts’ estimates, again. In its 2nd quarter earnings release, total revenue increased, but it was still 1.2% lower than predicted. And EPS was much lower than expected, with the company underperforming by 13.6%.
That follows a consistent trend over the last 4 quarters where Dollar General hasn’t been able to meet expectations. The company brought in net income of $468.8 million in the quarter, but it was still 30.9% below the $678 million reported in the same quarter of 2022.
The drop in net income led to a 28.5% hit to diluted EPS from where the company came in last year. DG bears will also point to the fact that same-store sales dipped slightly (0.1%) in the quarter as a sign that customers are taking their business elsewhere. The decline in traffic was felt hardest in the home, apparel, and seasonal segments.
Dollar General Earnings Multiple Is Attractive
Because the stock has fallen so sharply, DG’s valuation has become increasingly compelling. The stock’s P/E ratio currently stands at 10.62. That comes in slightly below the retail industry at large with a P/E value of around 11.
That’s also far below the company’s closest competitor, Dollar Tree, with a P/E ratio of around 19. While it’s worthwhile to note that Dollar Tree shares have also taken a beating this year, that stock is only down around 25% so far year-to-date.
Bulls could take that as another sign that Dollar General has been unfairly sold.
Will Dollar General Stock Recover?
Even if stock is undervalued, it’s all for nought if the discount retailer cannot combat long-term secular headwinds.
To combat its declining traffic, Dollar General leadership announced an effort to reduce inventory and invest in its retail labor force in an attempt to improve in-store customer experiences.
This effort is projected to increase profit by $170 million over the last half of 2023, but it may not be enough. The company’s leadership still downgraded guidance for the rest of the year.
Net sales are now expected to increase 1.3% to 3.3% for the remaining part of the year compared to the previous estimate of 3.5% to 5% growth.
A similar reduced expectation for same-store sales with diluted EPS forecast to decline by between 22% and 34% from last year.
How Do Analysts Rate DG?
While things may seem dire for Dollar General, the stock has already taken a major hit. That has led many analysts to believe that DG has hit close to bottom at this price point.
Out of 30 analysts who have submitted ratings, the consensus is to hold on to Dollar General right now.
There are only 3 Sell ratings currently, with the most bearish forecast indicating that DG will slightly drop 1.6% over the coming year. The more established line has the stock bouncing back 37.8% in the next 12 months to $142.80.
Even though the majority of analysts are in the hold camp, Dollar General does have 10 buy ratings, with 3 of those analysts predicting that DG will outperform the market over the next 52 weeks. The bull case has the stock jumping by over 100% to $210, which would still be lower than where it was trading in late 2022.
What Is Needed for DG To Bounce Back?
The main reason for the stock’s drop is that the company has continued to lag behind expectations. But as expectations are tempered to match the company’s guidance, it’s possible that alone will be enough to cause shares to plateau and form a base before rebounding.
A boost to the retail sector at large would also help, but it’s unclear whether that will happen over the coming year.
Still, analysts clearly believe that Dollar General will weather the storm and the stock will bounce back by late 2024. So even if the company does not make any significant changes to its model, it could still rise.
Is the DG Dividend Yield Worth Buying?
Because of the lack of short-term catalysts for Dollar General, the stock looks more like a long-term play for investors who are looking to buy in while it’s undervalued. But there’s another positive for long-term DG buyers in the form of a dividend that has been paid since the 1990s.
The current quarterly dividend of $0.59 per share represents a 2.22% annual dividend yield. While that isn’t going to land DG on the list of high-dividend stocks anytime soon, it’s still an incentive for investors with a long-range mindset.
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