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Dollar General Corporation (NYSE:DG) got an upgrade from Edward Jones on strong fundamentals.
Shares fell 0.89% on Wednesday.
DG was upped to Buy from Hold on “the attractive fundamentals of the dollar-store industry, the reduced impact from internet competition, the long-term potential for continued store growth, and the expected market-share gains should drive growth for the foreseeable future,” analyst Brian P Yarbrough wrote in a note.
The analyst also cited a high percentage of revenue coming from consumable items that should lead to more consistent revenues and earnings growth.
The comments may be a read-through for Walgreens Boots Alliance, Inc. (WBA), CVS Health Corporation (CVS), Dollar Tree (DLTR) and Walmart (WMT).
DG’s attractive store economics come from operating smaller stores that become cash-flow positive within the first year of operation, which is faster than the retail-industry average, and with few employees.
The company expects to open around 1,000 new stores per year for more than 20,000 locations.
Also in DG’s favor: Core customers can’t afford online membership costs for free two-day shipping and with 50% of transactions done in cash, online is not an option. Finally, many purchases are needs-based, and customers in rural towns cannot wait three days or more to get a delivery, the analyst wrote in a note.
For the first quarter, the dollar store missed estimates with EPS of $2.34 missing by $0.05 and revenue of $9.34B by $120M.
The company also lowered its full-year sales growth forecast to 3.5% to 5% compared to its previous expectation of 5.5% to 6%. Same-store sales growth was expected in the range of 1% to 2%, compared to the previous expectation of 3% to 3.5%.
DG, which reports earnings on August 31, is expected to report EPS of $2.47 and sales of $9.92B for the second quarter.
On the first quarter earnings call earlier this year, Chief Executive Officer Jeff Owen noted continued food inflation pressuring customers, on top of the loss of the child tax credit and smaller-than-expected tax refunds.
“The changes this year are contributing to their financial insecurity, and many are using lower refunds to simply afford basic household essentials, while others are contracting their overall spending,” Owen said.
Shares are down 36% this year.