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Dollar General: Why This Discount Chain Deserves Premium Prices

One stock is bucking a challenging retail environment. Shares in discount chain store Dollar General (DG) are soaring 14% in the last five days. The reason: DG has just delivered a categorically strong quarter underscored by consistent operational execution- in what was supposed to be a relatively weak quarter. As a result the stock’s total year-to-date now stands at an impressive 44%.

KeyBanc: DG Is A Top Pick

“DG remains one of our top picks, positioning investors for growth and defensiveness” cheers top KeyBanc analyst Bradley Thomas. He has just reiterated his buy rating on the stock while ramping the price target to a Street-high $180 from just $148 previously. From current levels that suggests a further 15% upside potential lies ahead.

2Q EPS was ahead of expectations, notes the analyst, driven by better-than expected sales, gross margin, and expense leverage. Specifically, EPS came in at $1.74, easily beating the $1.57 consensus estimate. Sales of $6.98 billion also sailed past the $6.89 billion expected by the Street. And the company’s same-store sales rose 4% vs the expected 2.5%. Meanwhile management raised 2019 guidance, even considering elevated tariffs.

“We remain positive on the near-term and long-term opportunity ahead for DG, supported by generally consistent execution, numerous initiatives to drive growth, and management’s long-term focus” the analyst told investors on August 30.

RBC Capital Chimes In

A similar message comes from RBC Capital’s Scot Ciccarelli. Given its “staple-like” business model and current momentum, Ciccarelli reiterates his buy rating on DG while significantly hiking his $146 price target to $168.

“Dollar General posted one of its best quarters in several years as the company benefits from multiple initiatives like DG Fresh and Fast Track as well as a fairly healthy lower- to middle-income consumer base” the analyst told investors, adding “While profit missteps occur too often for our taste (in both GM and SG&A), this was a very strong quarter.” He notes that the company has already reduced its sourcing exposure to China by ~7% this year and diversification efforts are continuing.

Staying Sidelined

However, not everyone had such an enthusiastic response. For instance, Credit Suisse analyst Judah Frommer has decided to stay neutral on DG for now. “We raise our estimates to the high-end of 2019 guidance and our12-month target price to $154 (from $130), but remain on the sidelines, as we believe risk/reward is balanced at current levels given a clear and deserved quality premium” the analyst explains.

He sees each margin-driving initiative supporting total company operating margin in 2020, but continues to model an approx. flat margin year-over-year versus 2019.

Word on the Street

Nonetheless, DG boasts a resounding Strong Buy consensus from top analysts. Out of 18 analysts covering the stock in the last three months, 17 rate DG a buy. That’s with a $170 average analyst price target.

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