MKM Maintains Buy On Dollar General Despite Disappointing Q2

MKM Partners maintained its Buy rating on Dollar General Corp. DG, despite "disappointing" second quarter results, as it believes the company's long-term trends still support a bullish view.

"While we are tempering our 2H16 outlook, we believe the LT growth story -- 6%-8% footage, 2%-4% comps, 10%-15% EPS growth -- remains intact," analyst Patrick McKeever wrote in a note.

Dollar General's same-store sales were positive and better than most retailers, but was lower than the first quarter and missed expectations as food price deflation and cuts in food stamp assistance had a bigger impact than anticipated. EPS grew 14 percent to $1.08, just shy of MKM's $1.09 estimate.

The company confirmed its 10-15 percent EPS growth guidance for FY16. But, MKM's view was above the implied range (of $4.36-$4.55) and it now takes a more conservative approach. For the third quarter, the brokerage now expects 1 percent comps versus a prior 3 percent and ex-items EPS of $0.98, down from earlier estimate of $1.01.

The analyst also slashed his fourth quarter outlook -- comps to 1 percent from 3 percent, and EPS to $1.46 from $1.49. For FY16, the analyst now sees 1.2 percent comps and EPS of $4.55 (down from $4.62).

McKeever also trimmed his price target by $11 to $86.

"While we don't have all the answers to the 2Q16 slip, LT trends are still in DG's favor -- no negative comps since the 2009 IPO, continued share gains in both units and dollars, rising sales per square foot -- and we don't think there has been a significant shift in consumer preferences away from the dollar stores," McKeever highlighted.

"While it may take more than a quarter or two, the softer trend is likely to prove temporary, in our opinion," McKeever added.