In the competitive landscape of discount retailing, Dollar General Corporation (NYSE:DG) has been a subject of intense scrutiny by Wall Street. The company, known for its broad network of stores offering a variety of consumer goods at low prices, is at a pivotal juncture as it navigates through a challenging economic climate and implements its “Back to Basics” strategy under the reappointed CEO Todd Vasos.

Company Overview
Dollar General operates within the Retailing – Department Stores & Specialty Softlines sector. The company is a discount retailer in the United States, offering a wide assortment of merchandise, including consumables, seasonal items, home products, and apparel. With its promise of affordability and convenience, the retailer has carved out a significant niche in the American retail space.

Market Performance and Analysts’ Perspectives
Analysts have noted improvements in Dollar General’s comparable store sales and earnings per share, suggesting early signs of a successful implementation of its strategic initiatives. However, concerns remain regarding a projected down year for EPS in 2024, with anticipated margin pressures and the necessity for sales to significantly improve to meet future financial targets. The bearish sentiment is underscored by the company’s lagging digitalization strategy compared to competitors and earnings downgrades suggesting potential financial underperformance. The absence of short-term growth catalysts further dampens the outlook.

Dollar General’s core low-end consumer base is experiencing economic stress, with diminished pandemic-related savings, persistent inflationary pressures, and reduced government assistance. Middle-income consumers are expected to deplete their excess savings by the end of fall, with additional headwinds such as student loan repayments and higher interest rates. These factors contributed to negative low-single-digit core same-store-sales in the first half of the year, excluding contributions from real estate initiatives.

Strategic and Operational Challenges
The company’s “Back to Basics” strategy under CEO Todd Vasos focuses on lower inventory levels and improved delivery times. Despite positive trends, the analysis predicts another down year for EPS in 2024 due to normalization of incentive compensation and ongoing shrink headwinds. Sales comparisons are expected to become more favorable starting from Q3, yet there is no commitment to operating margin expansion for the foreseeable future due to challenges such as elevated levels of shrink, a high mix of lower-margin consumables, uncertain promotional backdrop, and structural labor and wage investments.

A recent lawsuit by the Missouri Attorney General accused Dollar General of charging higher prices at the point of sale than advertised on tags or shelves, an issue that has previously arisen in other states. This underscores the potential need for Dollar General to invest further in both pricing strategies to remain competitive and labor to ensure price accuracy in stores.

Leadership and Guidance Revisions
In a surprising turn of events, Dollar General announced a CEO transition, with Todd Vasos rehired as CEO after retiring in November 2022. This change is seen as a potential positive for investor sentiment and may lead to investments that could stabilize the business. Despite this change, the firm maintains a cautious outlook for DG into 2024 due to the difficult environment.

Bull Case
Can Dollar General rebound under new leadership?
The return of former CEO Todd Vasos is viewed as a potential catalyst for strategic changes that could right the course for Dollar General. Vasos’s previous tenure from 2015-2022 was marked by growth and multiple rerating stories, which could bode well for the company’s future. The company is expected to undertake a significant margin reset in 2024 to pave the way for a return to comp and EBIT dollar growth in FY25 and beyond. With Vasos at the helm, there is potential for strategic investments to stabilize the company’s performance and for improvements in P&L to start next year and further into 2025, aiming for margins closer to 7%-8%.

What upside potential exists for Dollar General’s stock?
Despite the recent performance issues, analysts from BTIG have observed what appears to be a capitulation in DG’s stock, with a record low weekly Relative Strength Index (RSI) of 18. The stock is trading significantly below its 200-day moving average, suggesting a favorable risk/reward potential for a multi-week rebound. There is a possible upside of approximately 17%-30% towards the $135-$150 range, with a recommended stop-loss strategy under $110 for managing risk.

Bear Case
What are the risks facing Dollar General’s market share?
Dollar General faces a challenging macroeconomic environment with consumer spending pressures. Competition from other dollar stores and large retailers like Walmart (NYSE:WMT) and Dollar Tree (NASDAQ:DLTR) is intensifying, potentially impacting market share. The company faces risks associated with pricing accuracy and labor optimization, with ongoing legal issues regarding pricing discrepancies and the need for additional investments that may impact profitability.

How will economic pressures impact Dollar General’s core consumer base?
The core low-end consumer base of Dollar General is experiencing economic stress, leading to negative same-store-sales. With the middle-income consumers expected to deplete their excess savings soon, there are concerns about the sustainability of growth as the dollar channel may approach store saturation. Economic downturns could further negatively impact consumer spending habits, intensifying competition within the retail sector.

SWOT Analysis
Strengths:

– Extensive network of stores offering a variety of consumer goods at low prices.

– Historical growth under former CEO Todd Vasos’s leadership.

Weaknesses:

– Lagging digitalization strategy and pricing accuracy issues.

– Elevated levels of shrink and a high mix of lower-margin consumables.

Opportunities:

– Potential for strategic investments and operational improvements under new leadership.

– Favorable risk/reward potential for stock rebound.

Threats:

– Intensified competition from other dollar stores and large retailers.

– Macroeconomic pressures on the core consumer base impacting spending habits.

Analysts Targets
– J.P. Morgan: Downgraded to Underweight with a price target of $116.00 (September 20, 2023).

– BMO Capital Markets: Market Perform with a price target lowered to $130.00 (November 07, 2023).

– Barclays: Equal Weight with a price target of $124.00 (December 11, 2023).

– Gordon Haskett: Upgraded to Buy with a price target of $140.00 (October 13, 2023).

– Wolfe Research: Outperform with a price target of $152.00 (October 13, 2023).

– Morgan Stanley: Equal-weight with a price target of $125.00 (October 13, 2023).

– Piper Sandler: Neutral with a price target of $127.00 (December 08, 2023).

The analysis spans from September to December 2023.