Goldman Neutral On Dollar General, Sees Earnings Growth Slowing

Dollar General Corp. DG reported its softest SSS growth in 2Q16 since Q4 of 2007. External factors and increased competition seem to be weighing on the company’s performance, Goldman Sachs’ Stephen Tanal said in a report. The rating on Dollar General has been downgraded from Buy to Neutral, with the price target of $84 implying merely 15 percent upside.

“DG is executing well against an ambitious plan and compounding value, but we expect near-term deceleration and see risks tilted to the downside,” analyst Tanal commented.

Good Execution, Good Returns

Dollar General had undertaken an ambitious expansion strategy. The company has been consistently generating low-double-digit EPS growth, backed by mid-single-digit square footage growth and low single-digit SSS. EPS growth has also been boosted by share repurchases.

Dollar General has announced plans for delivering shareholder returns of 11-17 percent, driven by EPS growth of 10-15 percent. “We like the visibility this affords investors and like the consistency of the business that has enabled DG to meet or exceed its EPS target in each of the past five past years and to meet or exceed its shareholder return goal in four of the past five,” Tanal wrote.

SSS Slowdown

Dollar General’s SSS has slowed and earnings growth may decline for at least the next three quarters. Increased competition, along with unfavorable exogenous factors [such as cuts to SNAP benefits, food deflation, and changes to overtime pay exemptions] could weigh on the company’s performance, the analyst added.

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