6 Reasons Dollar General Isn't Worth Buying Right Now

Dollar General Corp. DG shares traded lower by 3% on Monday following a downgrade.

The Analyst: Bank of America analyst Robert Ohmes downgraded Dollar General from Neutral to Underperform and cut his price target from $225 to $190.

The Thesis: In the note, Ohmes listed six reasons he is now bearish on the discount retailer:

• Dollar General sales have historically been negatively correlated to gasoline prices, which have been on the rise heading into summer travel season.
• The company is facing difficult year-over-year pandemic comps at the same time grocery stores are returning to sales promotions.
• Online grocery penetration by Amazon.com, Inc. AMZN, Walmart Inc WMT and others is pressuring Dollar General’s market share.
• The return of prescription drug sales at both food retailers and drug stores could pressure Dollar General’s traffic and same-store sales.
• Dollar General is poorly positioned to manage wage growth given wages currently represent about 10% of Dollar General’s total sales and Ohmes said most associates start at or near state minimum wage levels.
• Dollar General shares will likely experience earnings multiple contraction in an environment of decelerating and even negative same-store sales growth.

“We expect same store sales to inflect negatively in F1Q22 as DG begins lapping avg. ticket benefits from highly elevated consumables inflation,” Ohmes said.

Bank of America is projecting an 11.5% decline in EPS and a 1.3% drop in sales in fiscal 2022.

Related Link: Walmart Analysts Break Down Q1 Beat: 'Impressive Results Against Tough Comparisons'

Benzinga’s Take: The good news for Dollar General investors is that the stock already trades at around 19 times forward earnings, so its valuation downside may be limited. In addition, once the company makes it through a difficult period of comps over the next several quarters, Bank of America is expecting sales growth to rebound to +8.5% in fiscal 2023.

(Photo: Dollar General)