Shares of Dollar General (NYSE: DG) are down 7% in early trading after the company delivered its second-quarter earnings report. However, based on recent analyst sentiment as well as the general state of the economy, I perceive this to be an overreaction that investors can use as a buy-the-dip opportunity.
Dollar General’s net income was down 23% from the same quarter in 2020. But it appears that analysts had largely been expecting that. In fact, the company’s earnings per share (EPS) came in at $2.69; a 13.7% year-over-year (YOY) decline from the $3.12 it delivered in Q2 2020. However, that number was 7 cents higher than the forecast of analysts who were anticipating EPS of $2.62.
And the same story was true of revenue. Dollar General came in with revenue of $8.65 billion which was more than the $8.61 billion forecast by analysts but shy of the $8.68 billion the company delivered on a YOY basis.
Now Fundamentals Matter?
To reiterate my initial point. I view the investor’s initial reaction to the Dollar General earnings report to be an overreaction. Otherwise, it’s hard to explain the steep drop other than to say maybe fundamentals do matter. Who knew?
In addition to lower profits, the company reported a decline in same-store (comparable store) sales of 4.7% in the quarter. For retail chains, same-store sales will always be a headline number so it’s not surprising that investors are “selling the news.”
However, the company issued improved its full-year guidance for same-store sales. Keep in mind, that dollar stores are entering a time when they will face tough comparisons to 2020 when millions of Americans were stocking up on everyday items. So it’s not surprising that Dollar General is projecting a YOY decline in same-store sales for the full year. But the company did raise that guidance and now are forecasting same-store sales to be down 3.5.% to 2.5% from earlier guidance of 5% to 3% decline.
How concerned should investors be?
Dollar stores in general, and Dollar General in particular, were among the pandemic winners. The company’s footprint of stores tends to be in less densely populated areas. This was a benefit as many Americans were looking for local shopping options. And Dollar General has made significant strides in its digital outreach in the past year.
And while it’s fair to say that 2021 may make for tough comparisons, the current inflation that consumers are seeing in groceries and household items plays to the strength of the dollar store model.
On the other hand, it’s not a good thing to see a company that is seeing (more or less) steady revenue making less profit. It’s like the restaurant that outsells the competition but is still losing money. Dollar General is pointing to supply chain issues as being the source of its profit woes. And given the fact that dollar stores operate on razor-thin margins, supply chain bottlenecks have a more direct accretive effect to the bottom line.
Analyst sentiment is still positive
It’s too early to tell how analysts will react to Dollar General’s earnings report. However, according to MarketBeat data on Dollar General, in the week leading up to the earnings announcement, two analysts had raised their price target for the company and another reiterated its rating. And keep in mind that DG stock was upgraded in March and the stock saw a rally at that point.
And prior to earnings, Dollar General was trading near its 52-week high. So a dip in the stock price gives investors room to ride the next leg up. And with inflation likely to remain elevated for the remainder of 2021 at least, it looks like an excellent time to buy DG stock.
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