3 Things Dollar General Bears Just Don’t Understand About The Company Right Now

There’s no denying that general dollarhis (DG -3.15%) the second quarter was just bad. Not only did its top and bottom line results fall short of analysts’ expectations, but its same-store sales growth was anemic and profits fell year over year. The company withdrew its estimates for the full year. The stock has been duly punished for all of this.

There are, however, a handful of details that Dollar General bears may also want to consider before deciding to stick with their pessimistic conclusions. Indeed, there are three standout reasons for investors to try Dollar General stock while it’s deeply discounted.

1. The drop in sales last quarter was temporary

The discount retailer’s top line grew 4.2 percent during the fiscal second quarter ended Aug. 2, but almost all of that growth came from new store openings. Same-store sales (revenues from stores open at least a full year) rose just 0.5%. For comparison, Walmart (WMT 1.22%) reported same-store sales growth of 4.2% for the comparable quarter, while Aimhis (TGT 0.44%) the increase was 2%.

According to Dollar General Manager Todd Vasos, “weaker sales trends are partially attributable to a core customer feeling financially constrained.” This view reflected recent comments from executives at a number of consumer companies, and is not an inaccurate explanation either. Inflation was still above 2% in Q2, the impact of several years of much higher inflation is still being felt, and interest rates were higher than they have been in decades. That’s probably why, after months of improvement, the Conference Board’s measure of consumer confidence fell in June, then fell again in July. In September, the largest decline in economic confidence came from consumers with annual incomes of less than $50,000 — Dollar General’s main customer demographic and a group that simply cannot “trade up” in the same way in which can make buyers with higher incomes.

However, that short period of time was a perfect storm of monetary misery. Interest rates are now falling, driven lower by the Federal Reserve’s 50 basis point (0.5%) cut in the benchmark federal funds rate in September. Inflation also continued to moderate and personal spending rose in line with higher incomes in August. Gross domestic product managed to grow by 3% in the second quarter, despite the difficult context.

There is still a lot of rebuilding work to do. But last quarter’s lethargy arguably marks the absolute low point in the spending power of Dollar General’s target consumers.

2. (Some) rivals wither

Dollar General isn’t the only discount retailer on the ropes. Large Lots filed for bankruptcy in early September and The dollar tree (DLTR -3.83%) announced in June that it was looking at “strategic alternatives” for the Family Dollar store chain it acquired in 2015. The company has struggled to make Family Dollar everything it originally hoped it would be, so much so that a potential sale or spinoff is now on the table. .

This does not mean that the more than 1,300 Big Lots stores or the 7,761 Family Dollar stores operating today will close. The reason Big Lots filed for Chapter 11 bankruptcy and Dollar Tree began its strategic review of the Family Dollar unit, in fact, was because their management teams were looking for the best ways to keep as many of these stores open.

Both rival store chains are clearly on the defensive, suggesting their management teams may be distracted or unwilling to invest in stores with uncertain futures. These conditions create opportunities for Dollar General to gain market share.

3. Dollar General stock is underpriced

Now down 30% from its late-August high and 46% below its March peak, Dollar General stock is too cheap to pass up.

Consider first its simple assessment. Priced at just 13.6 times this year’s estimated earnings per share of $5.84 and valued at about 15 times next year’s estimated earnings per share of $6.32 per share, Dollar General’s stock is the same as cheap as they have been at any point in the last decade, during which the company. he was growing like crazy.

DG PE report data by YCharts.

Moreover, data compiled by New York University’s Stern School of Business indicate that the general merchandise retailer’s average inventories are lagging and forward price/earnings ratios are both greater than 20, while the retail stock is trading at just under 17 times past and projected earnings.

Perhaps even more optimistic is the fact that Dollar General’s stock is undervalued relative to analyst estimates. Their average 12-month price target is $98.92, which is more than 17% higher than the stock’s recent price.

True, the analyst community is still generally bullish on the company — most who cover it rate the stock as a simple hold. However, there are a handful of buy and even strong buy ratings, and there is only one underweight rating. At the very least, this suggests that the analyst crowd feels a rebound is possible, even if not guaranteed.

Reward worth the risk and volatility

Clearly, the company still has work to do if it’s going to pull off a turnaround, and in the meantime, shareholders will be taking on a lot of risk. Investors looking for a more reliable core holding for their portfolios should put this retailer on their watchlists for now.

Still, if you have room in your portfolio for a little calculated risk, Dollar General’s potential payoff now outweighs its plausible downside. Most (if not all) of his potential bad news is already included in the stock. The biggest concern here is just the continued volatility that is sure to be in the books as other investors begin to weigh in on Dollar General’s lingering challenges.