Is Dollar General's Rally Done?

Dollar General Corp. (NYSE: DG) has posted solid gains since the stock bottomed out in mid-March, but one analyst believes that the stock has run its course and will be slowing from here.

RBC Capital Markets downgraded the shares to a Sector Perform rating from Outperform. Though it raised the price target to $206 from $207 as well, that implies downside of 3.7% from the most recent closing price of $213.90.

While RBC believes the company continues to execute at a high level, the improving employment environment may reduce trade-down/in activity, even as rising food and gas prices squeeze its existing customers. As stimulus benefits fade, the brokerage firm thinks Dollar General’s growth may slow more or faster than some other retailers, which may make it difficult for the company.

At the same time, RBC thinks that macro headwinds (core inflation) may be building. The firm still expects sales-to-earnings upside in the near term, helped by the latest round of stimulus, but with the stock’s recent re-rating (up over 20% since mid-March) and what may become a less favorable economic environment, RBC is moving to the sidelines on Dollar General.

In the report, RBC further detailed:

We believe that Dollar General’s sales surged in 2020 due primarily to the sharp spike in unemployment (~15% in April 2020) and resulting trade-down/in activity and then later from multiple rounds of stimulus. However, employment rates continue to recover (unemployment is down to ~6%), which we think will lead to less incremental trade-down/in activity. Further, food and gas prices continue to rise, which squeezes the existing wallets of their core customer base (lower-to-middle income consumers). Given these dynamics, we think the broader economic environment is poised to become less favorable for Dollar General, especially as stimulus benefits start to fade.

As a result, RBC believes that Dollar General’s strong sales may be less durable than that of several other companies, which may make it more difficult for Dollar General shares to outperform.

Dollar General stock traded down about 2% on Wednesday to $209.47, in a 52-week range of $173.50 to $225.25. The consensus price target is $233.88.

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