How Analysts Are Changing Tune on Dollar Stores

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Dollar General Corp. (NYSE: DG) and Dollar Tree Inc. (NASDAQ: DLTR) both reported earnings before the markets opened on Thursday. The rivalry is continuing between these two, but there is no clear winner yet. Although Dollar Tree won the Family Dollar acquisition, it wasn’t enough to win the quarter. After the companies reported, analysts took the opportunity to reevaluate how they view these dollar stores, and the consensus was not exactly favorable.

24/7 Wall St. has included highlights from each of the earnings reports, as well as the analysts’ commentary after the fact.

Dollar General said that it had $1.08 in earnings per share (EPS) on $5.39 billion in revenue. The consensus estimates from Thomson Reuters had called for $1.09 in EPS on $5.5 billion in revenue. In the same period of last year, Dollar General posted EPS of $0.95 and revenue of $5.1 billion.

Same-store sales increased 0.7%, driven primarily by an increase in average transaction amount, offset by a decline in traffic. Same-store sales increases were driven by positive results in the consumables category, accompanied by results in the seasonal category that were flat when compared to the 2015 second quarter, offset by negative results in the apparel and home categories.

In terms of guidance for the fiscal year, the company expects to have EPS growth in the range of 10% to 15% and capital expenditures in the range of $580 million to $630 million. The consensus estimates for the full year call for $4.64 in EPS (compared with $3.96 in EPS in the previous year) on $22.41 billion in revenue.

Credit Suisse took an on-the-fence perspective and downgraded Dollar General stock to a Neutral rating and lowered its price target to $80 from $85. In the report the firm detailed:

Dollar General’s impressive stock run looks to be over sooner than we anticipated, as Q2 results signal a material deceleration in earnings momentum. Bottom line performance was only a touch below consensus, but a comp miss on negative traffic was a clear disappointment. A solid gross margin, expense control and lower tax rate made up for most of the shortfall. The company highlighted weather, food deflation, and SNAP as the largest top line issues, but commentary about intensifying competition from other staples players (likely includes Wal-Mart) was notable and its clear underlying business momentum has slowed. Visibility on a reacceleration is low in our view, even with the company poised to react with its own price cuts. This development adds to the recently introduced incremental wage pressure from new overtime rules, and combined now creates visible downside risk to forward consensus estimates. We expect these headwinds to weigh on the stock, making Outperformance to the staples group unlikely.

Merrill Lynch was more positive in its assessment. The brokerage firm maintained a Buy rating with a $95 price target, seeing this decline as an overreaction given that EPS grew by 13% and guidance was maintained. The firm argues that the miss on comps was driven by deflation, a reduction in SNAP, a mild spring and intense promotional environment. However the company did trim its EPS growth forecasts for 2016 to 2018, down to 17%, 12% and 14% respectively.

A few other analysts also gave their two cents on Dollar General:

  • BMO downgraded it to Market Perform from Outperform and cut its price target to $78 from $95.
  • Goldman Sachs has a Buy rating and lowered its price target to $89 from $97.
  • Jefferies has a Hold rating and cut its price target to $78 from $96.
  • Raymond James cut its price target to $95 from $105.
  • RBC has an Outperform rating and lowered its price target to $90 from $103.
  • S&P Global maintained a Buy rating with an $85 price target.
  • Telsey Advisory downgraded it to Market Perform from Outperform and cut its price target to $84 from $102.
  • UBS has a Buy rating and lowered its price target to $92 from $101.