Dollar General 'A Top-Tier Retail Name' - Bullish Analyst Upgrades Stock

Barclays analyst Seth Sigman upgraded Dollar General Corporation DG to Overweight from Equal Weight, raising the price target to $154 from $124.

The analyst sees a compelling margin recovery through 2024, along with optionality for sales improvement as a result of operational improvements.

According to Sigman, the upside to the stock mainly lies in improved EPS visibility for 2025.

Much of DG's issues in 2023 stemmed from inventory, which is being addressed. 

Per the analyst, DG still had >$1 billion of excess inventory as of Q3, which will be cleaned up by Q1/Q2, particularly if the company continues to plan NCI conservatively. 

That should help sales and margins, improve stock levels by improving inventory flow, and drive lower markdowns and potentially shrink. 

Overall, the analyst views DG as a top-tier retail name and sees signs that it may be early in a turnaround with margin recovery and sales optionality driven by operational changes, including labor investments, supply chain efficiency efforts, and inventory improvements.

However, sales outlook is still uncertain, the analyst cautions. Comps may remain under pressure as inflation moderates in consumables and non-consumables continue to decline. 

DG could be a beneficiary of food deflation to the extent that it frees up wallet share to reallocate to higher-margin discretionary purchases. Beyond the macro, it's still unclear whether traffic or conversion drives sales weakness, which is related to the store experience issues, the analyst adds.

The analyst lowered the 2024 EPS to $7.04 (from $7.50, consensus of $7.49) while raising the 2025 EPS to $8.54 (from $8.44, consensus of $8.29).

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Price Action: DG shares are trading higher by 3.19% to $135.47 on the last check Thursday.

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