Analyst begs off of Dollar General stock

by The City Wire staff ([email protected]) 165 views 

Wal-Mart’s renewed focus on smaller store formats is seen as a downward risk for Dollar General in the coming year, according to some industry analysts.

On Monday, (March 25) Dollar General reported decent fourth-quarter results of $317.4 million, or 97 cents per share.

The discounter’s profits improved from $292.5 million, or 85 cents per share, a year earlier and Wall Street had expected 90 cents per share on sales of $4.26 billion.
Sales rose slightly to $4.21 billion, but that wasn’t enough to woo Morningstar analysts into the Dollar General corner.

Analysts did like the discounter’s guidance for 10% to 12% top-line growth, 4% to 6% same-store sales growth and 8% to 13% earnings per share growth expected in 2013.

Morningstar analysts notes, “The guidance for top-line growth was ahead of our expectations, but management's profit growth expectations were in line with our forecast. We may adjust our near-term assumptions accordingly, but we are maintaining our tempered long-term top-line and operating margin projections as well as our $50 fair value estimate.”

Dollar General shares traded up nearly 2% following Monday’s (Mar. 25) news at $50.90 in the afternoon session.

“We believe the key to the Dollar General equity story is retaining the consumers gained during the 2008 recession and mitigating the eventual impact from Wal-Mart's small-store rollout. We still forecast Dollar General to increase market share and generate returns above its cost of capital, but we caution that the significant capacity being added to the sector by Wal-Mart and other dollar stores will eventually pressure sales and profit margins over the long term,” Morningstar equity analyst Ken Perkins notes on Monday.

Perkins adds: “Dollar General does not possess an economic moat, largely because consumer switching costs are negligible, and we think it could be difficult for the company to offset Wal-Mart's scale advantages and $6 billion in planned price cuts over the next five years.”

Perkins and his Morningstar team believe heightened competitive threats and possible near-term softness resulting from cuts made to government assistance programs could pose near-term downside risks for Dollar General stock.

“We think investors should wait to purchase Dollar General shares at a greater margin of safety,” Perkins noted.