Dollar General Corporation (DG) is scheduled to report its third-quarter results on December 7, 2023. While its revenue for the quarter is expected to rise over the prior-year quarter, its EPS is expected to decline.

In this piece, I have discussed why it could be prudent to avoid the stock now.

DG’s EPS in the third quarter is expected to decline 47.7% year-over-year to $1.22. Its revenue for the same quarter is expected to increase 1.9% year-over-year to $9.64 billion.

Looking back, DG failed to surpass analysts’ revenue and EPS estimates in the last reported quarter. DG’s CEO Jeff Owen said, “While we are not satisfied with our overall financial results, we made significant progress in the second quarter improving execution in our supply chain and our stores, as well as reducing inventory growth rate and further strengthening our price position.”

Management has lowered its 2023 guidance, with its net sales growth now expected in the range of 1.3% to 3.3%, compared to its previous expectation of 3.5% to 5%. Its same-store sales are projected to witness an increase of 1%. This is lower than the previous growth expectation of 1% to 2%.

The company expects capital expenditures, including the investments related to its strategic initiatives, to be between $1.6 billion and $1.7 billion. For fiscal 2024, DG’s EPS is expected to be between $7.10 and $8.30, a decline of 34% to 22%, compared to its previous year-over-year change expectation of an approximate 8% decline to flat growth.

DG’s stock has declined 45.3% year-to-date and 36.8% over the past year to close the last trading session at $134.83.

Here’s what could influence DG’s performance in the upcoming months:

Weak Fundamentals

DG’s gross profit for the second quarter (ended August 4, 2023) declined 0.1% year-over-year to $3.04 billion. Its operating profit fell 24.2% over the prior-year quarter to $692.31 million. The company’s net income declined 30.9% year-over-year to $468.84 million. Also, its EPS came in at $2.13, representing a decline of 28.5% year-over-year.

Mixed Analyst Estimates

Analysts expect DG’s EPS for fiscal 2024 to decline 30.1% year-over-year to $7.47. On the other hand, its revenue for the same period is expected to increase 2.2% year-over-year to $38.68 billion. Its EPS and revenue for fiscal 2025 are expected to increase 5.1% and 4.9% year-over-year to $7.85 and $40.57 billion, respectively.

Mixed Valuation

In terms of forward EV/Sales, DG’s 1.22x is 26.2% lower than the 1.65x industry average. Its 0.76x forward Price/Sales is 31.8% lower than the 1.12x industry average.

On the other hand, in terms of forward EV/EBITDA, DG’s 14.49x is 35.1% higher than the 10.72x industry average. Likewise, its 19.32x forward EV/EBIT is 30.6% higher than the 14.79x industry average. Its 18.18x forward non-GAAP P/E is 3.9% higher than the 17.50x industry average.

Mixed Profitability

In terms of the trailing-12-month net income margin, DG’s 5.59% is 14.1% higher than the 4.90% industry average. Likewise, its 4.30% trailing-12-month Capex/Sales is 34.2% higher than the industry average of 3.21%. Furthermore, the stock’s 1.32x trailing-12-month asset turnover ratio is 58.5% higher than the industry average of 0.84x.

On the other hand, DG’s 34.73% trailing-12-month Return on Common Equity is 197.4% lower than the 11.68% industry average. Likewise, its 8% trailing-12-month EBIT margin is 3.9% lower than the 8.32% industry average. Furthermore, the stock’s 10.02% trailing-12-month EBITDA is 10.8% lower than the industry average of 11.24%.

Poor Historical Growth

DG’s Tang Book Value has grown at a negative 25.2% CAGR over the past three years. Its net income has grown at a negative 2.5% CAGR over the past three years.

POWR Ratings Reflect Bleak Prospects

DG has an overall D rating, equating to a Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DG has an F grade for Growth, in sync with its poor historical growth.

DG is ranked last among 38 stocks in the Grocery/Big Box Retailers industry. Click here to access DG’s Value, Momentum, Stability, Sentiment, and Quality ratings.

Bottom Line

DG’s ongoing investments in the business, rising labor costs and operating expenses might weaken its bottom line. The company has lowered its fiscal 2024 sales outlook. Additionally, the issue of excess inventory could keep the company’s margins under pressure. Moreover, macroeconomic challenges and weak consumer spending trends could pose a problem for DG.

Given its weak fundamentals and poor historical growth, it could be wise to avoid the stock now.

Stocks to Consider Instead of Dollar General Corporation (DG)

The odds of DG outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three A (Strong Buy) and B-rated (Buy) stocks from the Grocery/Big Box Retailers industry instead:

Natural Grocers by Vitamin Cottage, Inc. (NGVC)

Marks and Spencer Group plc (MAKSY)

Koninklijke Ahold Delhaize N.V. (ADRNY)

What To Do Next?

Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today’s volatile markets:

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DG shares rose $0.74 (+0.55%) in premarket trading Tuesday. Year-to-date, DG has declined -44.29%, versus a 20.32% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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