Dollar General Upgraded At RBC, 'Margins Have Stabilized'

In a report published Wednesday, RBC Capital Markets analyst Scot Ciccarelli upgraded the rating on

from Sector Perform to Outperform, while raising the price target from $82 to $86. Dollar General is poised for improved sales, backed by an improving environment for low and middle income consumers. The company's sales are also expected to improve once the conversion of

to

is complete. "Further, GMs are starting to improve. If stacked sales trends and margins continue to improve as we expect, we believe DG shares can support a higher," analyst Scot Ciccarelli mentioned. The conversion of Family Dollar to Dollar Tree is expected to boost Dollar General's sales by $200-400 million. "While Family Dollar may ultimately become a tougher competitor under Dollar Tree's wing, we suspect that both Dollar General and Family Dollar can continue to take share from other retail venues, given their strategic blend of low-prices and convenient locations," Ciccarelli added. Dollar General's gross margins increased 45 bps in 1Q15, driven by a better mix of discretionary sales and higher initial markups. The company's EBIT margins were up 30bps during the same period, as against a decline for 8 straight quarters. In the report RBC Capital Markets noted, "These recent trends, along with improving shrink rates, should help GMs continue to expand in 2015. Further, while higher labor investments may modestly de-leverage SG&A, these investments could also result in higher incremental sales growth over time."