Telsey Advisory Group analyst Joseph Feldman reiterated an Outperform rating on Dollar General Corporation (NYSE: DG) with a price target of $185.
Dollar General will report 2Q23 earnings on Thursday, August 31.
The analyst believes the business should benefit from strength in consumables (~80% of sales)-with continued at-home consumption and inflation-and value-priced merchandise appealing to the current consumer. However, the results are expected to be partly offset by the impact of reduced SNAP benefits, weakness in discretionary categories, and elevated operating costs, including shrink and labor.
Feldman forecasts 2Q23 EPS of $2.54 vs. the FactSet consensus (FS) of $2.49.
In the near term, the company should benefit from strategic actions, including adjusting new store openings-990 new stores (down from 1,050 due to fewer pOpshelf openings).
The analyst notes that the company is also expected to gain from enhancing the DG Fresh supply chain, with ~5,000 stores in 2023.
Moreover, the consumer tends to seek value in times of financial duress, which historically has benefited Dollar General and its peers, Feldman adds.
For the quarter to be reported, the analyst anticipates total sales growth of 5% to $9.9 billion, with an inline comp of 1.0%.
However, the analyst forecasts inline 2Q23 operating margin contraction of 155 bps to 8.1%, reflecting a gross margin decrease of 70 bps to 31.6%, given an unfavorable mix shift toward consumables, shrink, and markdowns.
Going ahead, the analyst projects 2023 EPS to decline 4.5% YoY to $10.20. Feldman anticipates inline sales growth of 4.0% to $39.3 billion vs. the guidance of 3.0%-5.0%.
Overall, the analyst expects continued solid performance to be supported by new store openings, remodels, cooler door expansion, DG Fresh supply chain upgrades, Fast Track inventory/labor management, self-checkout rollout, NCI expansion, new products, and healthcare services.
Price Action: DG shares are trading lower by 0.83% to $161.64 on the last check Monday.