Comp Headwinds Persist For Dollar General, BMO Downgrades

Wayne Hood of BMO Capital Markets turned incrementally bearish on Dollar General Corp. DG and downgraded the stock to Market Perform from Outperform with a price target slashed to $78 from a previous $95 after a "disappointing" second quarter earnings print.

Hood's downgrade was mostly attributed to Dollar General's same-store sales growth of just 0.7 percent, which fell short of his 2.5 percent estimate and the Street's consensus estimate of 2.7 percent.

Hood also noted the following also played a part in his downgrade thesis:

• 1) Aggressive proactive price action in key markets on 450 traffic-driving items is under way and likely to be expanded
• 2) The price adjustments will "take time to resonate with consumers" and create a lag in same-store sales acceleration versus gross margin pressure
• 3) Deflation in key categories and a reduction in SNAP benefits hurt same-store sales by 60 to 70 basis points
• 4) Disruption from the Dollar Tree-Family Dollar merger "is likely to lessen" which makes it more difficult for Dollar General to grow its market share
• 5) Wal-Mart's price investments could adversely impact key seasonal items
• 6) Store checks have created worries over growing clearance inventory, and 7) FLSA costs related to overtime will have a $0.03 to $0.04 impact to its earnings per share in the fourth quarter and $0.06 per share throughout 2017.

Bottom line, the factors Hood noted resulted in a reduction in his earnings per share expectations for 2016 from $4.66 to $4.44 and 2017's earnings per share expectations from $5.42 to $4.88.