A meeting with the management of Dollar General Corp. (NYSE: DG) left JPMorgan bullish on the discount retailer.
JPMorgan analyst Matthew Boss upgraded shares of Dollar General from Neutral to Overweight and increased the price target from $104 to $116.
Dollar General is confident it will hit multiyear comps growth of 2-plus percent thanks to new store "waterfall" and in-house initiatives, Boss said.
The analyst shared five takeaways from the meeting in a Tuesday note:
- Low-end comps tailwinds are now stronger than the headwinds facing Dollar General, Boss said. Modest wage increases and tax reform have put more money into the pockets of consumers, while higher-income consumers are attracted to the stores due to the company's expansion into perishables, the analyst said.
- Dollar General is confident in modest, multiyear gross margin expansion that's helped by shrinking of stores, global sourcing, a refocusing on private label, discretionary initiatives and vendor negotiations.
- JPMorgan sees a capital allocation inflection opportunity as Dollar General builds its balance sheet. The company intends to invest in high-return new stores, increase dividends in line with earnings growth and use excess free cash flow for share repurchase, Boss said.
- Dollar General pointed to 13,000 incremental industry store opportunities, the analyst said. JPMorgan estimates that it would take eight to nine years of 6-percent-plus square footage growth before reaching a saturation point.
- Non-consumables, which are being tested in the second half of this year with potential rollout in 2019, present a long-term top-line and margin opportunity, the analyst said.
The valuation of Dollar General shares provides an attractive multiyear risk-reward entry point, Boss said.
The Price Action
Dollar General shares have gained about 5 percent year-to-date through Monday.
The stock was up 2.88 percent at $99.87 at the close Tuesday.
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Photo by Michael Rivera/Wikimedia.
Latest Ratings for DG
|Apr 2018||Credit Suisse||Initiates Coverage On||Neutral|
|Apr 2018||JP Morgan||Upgrades||Neutral||Overweight|
|Apr 2018||Raymond James||Downgrades||Strong Buy||Outperform|
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