Global insights driving the market strategies of tomorrow.

BofA: DG.US inventory levels improve, upgrade to "buy"

Market IntelFriday, Dec 6, 2024 8:20 am ET

1min read

Zhitong Finance learned that Bank of America raised its rating on Dollar General Corporation (DG.US) from "Underperform" to "Buy", and noted multiple early signs that its "back to basics" strategy is working, including significantly improved inventory levels, with inventory positions down 7% year-on-year per store.

Moreover, Bank of America said that Dollar General's in-store customer satisfaction survey has risen 900 basis points since the first quarter, which means customers are responding to store execution, and added that increased market share opportunities offset the competitive pressure from Walmart (WMT.US).

However, Bank of America cut its EPS estimate for fiscal 2026 from $6.90 to $6.15 to reflect the spending pressure in 2025 calendar year, including the return of incentive compensation (a drag of $0.40-0.50 per share) and wage growth, and also mentioned a strengthened promotional environment that may persist through 2025/26.

As of early November, Dollar General's same-store sales grew 1.3%, topping Wall Street analysts' expectations. Q3 revenue grew 5.1% year-on-year to $10.18 billion, slightly above market expectations. But adjusted EPS was 89 cents, below market expectations.

Dollar General currently expects full-year same-store sales to be between 1.1% and 1.4%, slightly below its previous growth expectation of 1% to 1.6%. The company currently expects full-year net sales to grow 4.8% to 5.1%, while analysts expect 4.77%. Dollar General also lowered the upper limit of its annual profit guidance and said the impact of $32.7 million of hurricane-related expenses in the third quarter - the company expects full-year EPS of $5.50 to $5.90, while its previous forecast was $5.50 to $6.20.

However, Bank of America also noted that competitors' store closures should support Dollar General's market share growth and help offset competitive pressure from Walmart, including 970 Family Dollar stores of Dollar Tree (DLTR.US) and CVS (CVS.US) recently completed its store optimization program.

Dollar General also optimized its distribution capacity by exiting temporary warehouse facilities, and Bank of America expects to benefit from inventory adjustments and its "Project Lift" store renovation plans, which will support the company's expected growth of 6-8% and 3-5%, respectively.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.