Dollar General Q3 Preview: Expect Weakness (NYSE:DG)

Dollar General Corporation (NYSE:DG) is set to report results for its Q3 that ended October 31st, 2023 after hours on Thursday, December 7th. Analysts expect the company to report a GAAP EPS of $1.21/share on the back of $9.64 billion revenue. Should Dollar General meet the estimates, it’d represent a YoY EPS decline of nearly 50% and a 2% YoY jump in revenue.

I’d bet that everyone living in the United States knows about Dollar General Corporation and what they do, but for the global audience reading this article, here is a quick recap of the company. Dollar General is a low-cost merchandise retail chain with nearly 20,000 stores in the United States and Mexico. Slightly contrary to its name, not everything is sold for a dollar, but like its peer Dollar Tree, Inc. (DLTR), Dollar General is one of the cheapest options available when it comes to many day-to-day product categories listed below.

With that background out of the way, let’s now preview Dollar General’s upcoming Q3 report on these parameters:

• Expectations heading into earnings
• Historical surprise
• Key things to look for
• Valuation
• Technical setup

Steadily Declining Expectations

Expectations have been on a steep decline over the last few months as Q3’s EPS estimate has gone down from $2.76 at the beginning of the year to $2.30 in June to just $1.21 at present. In addition, over the last 3 months, 15/17 EPS revisions and 11/12 revenue revisions have been to the downside. Based on this setup, it is fair to say that Dollar General is going into Q3 report with muted expectations.

Beat or Miss? Recent Trend Is Not In Favor

Dollar General Corporation has beaten EPS estimates 7 out of the last 12 quarters and revenue estimates 8 out of the last 12 quarters. While that sounds promising heading into Q3, if we look deeper, the recent trend is actually not in favor of the company. Both EPS and revenue estimates have come ahead of expectations just once in the last 4 quarters.

In addition, close peer Dollar Tree recently missed on both top and bottom lines. I expect Dollar General to follow suit and miss on both EPS and revenue metrics, given the declining expectations and retail weakness.

Key Things To Monitor

• Dollar General is on a nice streak of reporting YoY revenue increases, dating back to at least January 2022. It will be interesting to see if the streak continues, or if recent retail weakness will make Dollar General lose its streak.

• The company is also on another streak, this time an unwanted one, as operating expenses have increased QoQ since January 2022. I expect the company to break this streak and report lesser expenses on both a QoQ and YoY basis, as it should be well aware that cutting down expenses is the only thing in its control (as economy and demand aren’t).

• Finally, inventory build up is another key area I’d be watching in this report. At the end of Q2, Dollar General reported $7.5 billion on inventory, its highest level dating back to at least January 2021. Needless to say, having too much inventory is not good for any business, especially retail that is extra reliant on consumer and economic trends, not to mention, spending power of the consumer.

Valuation

• Dollar General stock is heading into earnings at a forward multiple of 18 while expected to lose earnings at the rate of 6.50%/yr for the next 5 years. Obviously, that makes the stock a risky and overvalued bet purely based on those numbers.
• However, the stock is trading at .80 times 2022’s revenue, making the case for severe undervaluation as we head into Q3 earnings. In the first two quarters of FY 2023, the company reported $9.3 billion and $9.8 billion, which once again confirms the undervaluation thesis based on sales multiple.
• At $134, the stock is trading nearly 10% above its median price target and therefore offers no margin of safety based on this metric.

Technical Indicators

Although the stock is down 10% YTD, it has been on an uptrend the last month, gaining nearly 15%. As a result, the stock has reasonable technical momentum heading into earnings with a Relative Strength Index [RSI] of 76 and is also trading close to its 100-Day moving average. However, the 200-Day moving is nearly 25% away and should the Q3 report turn out to be bad, and the stock loses ground on its 100-Day moving average as well, the stock’s long-term base (100- and 200-Day moving averages) is likely to be re-established lower.

Conclusion

Despite losing nearly 50% in the last year, Dollar General stock does not appear like it has found a bottom, technically or fundamentally. The economic headwinds may be too hard for even the strongest of retail companies to thrive in, and Dollar General is far from being strong at present. SA analyst Preston Yadegar raises a great point that the company’s ongoing focus on brick-and-mortar locations is detrimental to its long-term survival with people’s preference for e-commerce and direct to consumer model.

I rate the stock a “Sell” ahead of its Q3 report.

Seekingalph