Dollar General down as Citi downgrades stock on tough competitive positioning

Investing.com -- Citi analysts on Friday downgraded Dollar General (NYSE:DG) stock to Sell from Neutral and trimmed their price target on the stock to $73 from $91.

The move comes amid Citi’s concerns after DG’s challenging fiscal years 2023 and 2024, with comparable sales (comps) only slightly positive each year. Analysts also highlight the estimated fiscal year 2024 EBIT margin of 4.7%, a significant decline from the 8.4% margin in fiscal year 2019, despite a roughly 50% larger sales base.

Shares in Dollar General fell more than 2% in premarket trading.

According to Citi, the competitive landscape for Dollar General has also shifted unfavorably over the past five years, particularly with Walmart (NYSE: NYSE:WMT) strengthening its market position.

“DG is known for value. So is WMT, and WMT is tough to beat on price. DG is known for convenience. And increasingly since the pandemic, so is WMT, as the way consumers think about convenience is changing and WMT has upped its game with omnichannel delivery options,” analysts wrote.

“We believe WMT’s market share gains will continue to pressure DG, making a recovery very tough,” they added.

Looking ahead, analysts project that Dollar General's EBIT margin will remain under pressure, likely staying between 4-5% in the coming years unless the company can achieve over 3% in comparable sales growth, which Citi does not anticipate.

The firm attributes the margin pressure to the need for more competitive pricing and increased selling, general, and administrative (SG&A) expenses, including labor costs.

The report also comments on Dollar General's expansion from approximately 16,000 stores in 2019 to around 20,000 stores, suggesting that this growth has not translated into a stronger competitive position.

“We believe DG should stop opening stores to help steer the existing (large) fleet back on track,” analysts commented.