Dollar General's Strategy To Tackle Debt And Shrink Could Drive Margin Expansion, Analyst Says

BofA Securities analyst Robert F. Ohmes reiterated a Buy rating on the shares of Dollar General Corporation DG on Thursday with a price forecast of $90.00.

Dollar General is expected to benefit from increasing trade-in activity, which should help drive comparable sales and stabilize demand from its core customers, said the analyst.

The company saw early signs of this trend in the late third quarter, with more significant trade-in levels in the fourth quarter, leading to larger basket sizes in both dollar value and units.

While rising credit card debt may have delayed trade-in from middle-income consumers, reaching debt limits could further support this trend, noted the analyst.

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DG has seen inventory levels improve throughout 2024, following aggressive reductions that are expected to continue into the first quarter of 2025.

Store manager turnover also improved year-over-year and is projected to stabilize by late 2025. With slower store expansion, DG anticipates less cannibalization from new locations.

Additionally, an accelerated store remodeling plan covering 20% of stores annually is expected to reduce shrink, lower maintenance costs, and minimize operational disruptions, the analyst opined.

The company has several drivers for gross margin expansion, including strategic initiatives, shrink reduction, and lower damages.

A key contributor will be the DG Media Network, along with efforts to increase non-consumable sales by 100 basis points by 2027.

Dollar General’s Back to Basics strategy aims to enhance efficiency and reduce SG&A costs through initiatives like further SKU rationalization (building on ~1,000 net SKU reductions in 2024), inventory reduction, distribution center resets, and case pack optimization.

Price Action: DG shares traded lower by 2.24% at $85.58 at last check Friday.

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