Analysts downgrade Dollar General shares after Investing.com sell-off

Investing.com — Shares of Dollar General (NYSE: ) fell more than 32% on Thursday after the discount retailer reported second-quarter earnings and revenue that fell short of analysts’ expectations and significantly cut its estimates for the whole year.

Following the crash, analysts at Morgan Stanley and Telsey Advisory Group downgraded the stock.

The company’s struggles are largely related to a weaker base of low-income consumers and a tougher competitive landscape, which have made its growth path uncertain.

Morgan Stanley downgraded Dollar General from Overweight to Equal-weight, citing a “tougher path to growth” and lowering its price target to $100 from $170.

The investment bank’s downgrade reflects concern about the company’s ability to generate the necessary 3% comparable sales growth to raise spending, with market share growth looking unlikely in the near term.

Morgan Stanley noted that “the top line (was) pressured by a weaker low-income consumer,” while lagging margin recovery is a key issue, particularly as competition from giants such as Amazon (NASDAQ 🙂 and Walmart (NYSE: ) is ramping up.

The firm also pointed out that Dollar General’s earnings before interest and tax (EBIT) margins could remain around 4.7%, well below the 8.4% margin seen in 2019, indicating a difficult outlook for profitability.

Telsey Advisory Group also downgraded Dollar General, moving its rating from Outperform to Market Perform and lowering its price target to $103 from $168 per share.

Telsey pointed out that while Dollar General’s core lower-income customers visit stores more often, they have less money to spend, especially as they near the end of their pay periods.

Additionally, middle-income customers, who typically trade lower during tough economic times, are not doing so as expected. Instead, those customers are increasing their spending at competitors like Walmart and other discounters.

Telsey also noted that Dollar General has been forced to increase promotions to attract consumers, further squeezing margins.

Both firms point to growing competitive pressures and an uncertain path to recovery for Dollar General, making its outlook more cautious.