The Battle Plan For Dollar General Ahead Of Q4 Earnings And Beyond

Dollar General Corp. DG will report its fourth quarter earnings on Thursday. Investors will focus on comps, commentary about initiatives in pricing, investments and 2017 store opening plans.

Q4 Expectations

Michael Lasser of UBS believes Dollar General’s top-line remained stable, but sluggish in the fourth quarter. Lasser expects an EPS of $1.43, slightly ahead of the consensus estimate of $1.42. The analyst projects a 0.5 percent comp, slightly ahead of the consensus view of 0.3 percent.

Lasser, who reiterated his Buy rating, said the fourth quarter comp could have been pressured by 150-175 bps again this quarter following Wal-Mart's aggressive posture and competitive flare ups in certain markets, SNAP and deflation.

As such, the analyst sees a 55 bp gross margin decline in the fourth quarter and expects comp growth to remain under pressure for the next couple of quarters.

That said, the analyst is bullish on the stock, saying Dollar General's earnings algorithm is achievable and compelling.

“Sustaining 10%-15% annual EPS growth through a visible formula that hinges on 6%-8% square footage increases, modest comp growth, stable to increasing margins, and 5% reductions to shares outstanding should be handsomely rewarded by the market,” Lasser highlighted.

Price Investments

Looking ahead, one of the key debates on Dollar General is how much more price investment is needed to compete with the rest of consumables retail.  Lasser said surgical price reductions in selected additional markets may be necessary in the current environment.

“For every 10% of stores they make price investments in, it would drive 10-20 bps of GM pressure, all else being equal. Though, we think its sales will improve,” Lasser wrote in a note.

For FY2017, Lasser expects EPS of $4.61 (vs. cons. of $4.69) and comp of 1.4 percent and -40 bps of operating margin contraction.

What Loop Capital Expects

Meanwhile, Loop Capital’s Anthony Chukumba remains Hold-rated on Dollar General ahead of its earnings. Chukumba’s fourth quarter and F2017 EPS estimates of $1.39 and $4.73 are $0.02 below and $0.05 above consensus, respectively.

Chukumba, who expects the company to provide a “high-level” guidance for the full year, expects a 0.4 percent increase in the fourth quarter same-store sales and a 100-bps gross margin decline.

To become more positive on the stock, the analyst is looking for sequential improvement in same-store sales, food price deflation and better-than-expected profitability. Chukumba is waiting for a better entry point to become more constructive on the shares.

Lasser has a price target of $85, while Chukumba has a target price of $76.

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