Dollar General Declines as Citi Downgrades Stock Due to Challenging Competitive Positioning

Citi analysts downgraded Dollar General stock to Sell from Neutral and reduced their price target for the stock from $91 to $73. This decision follows concerns regarding the challenges the company is facing in fiscal years 2023 and 2024, with comparable sales showing only modest increases each year. Analysts also noted a projected fiscal year 2024 EBIT margin of 4.7%, a significant drop from the 8.4% margin recorded in fiscal year 2019, despite a sales base that is nearly 50% larger.

As a result of this report, Dollar General’s shares fell over 2% during premarket trading.

Citi pointed out that the competitive environment for Dollar General has worsened in the last five years, particularly as Walmart has strengthened its position in the market. Analysts remarked that while Dollar General is recognized for its value offerings, Walmart has also established itself in this arena and poses a significant challenge, especially regarding pricing. Moreover, Walmart has enhanced its convenience factor since the pandemic, adapting to changing consumer perceptions with improved omnichannel delivery options.

Looking forward, analysts expect that Dollar General’s EBIT margin will remain pressured, likely fluctuating between 4% and 5% in the near future unless the company can achieve comparable sales growth exceeding 3%, which Citi doesn’t expect. They attributed the margin pressure to the necessity for more competitive pricing and rising selling, general, and administrative expenses, particularly labor costs.

Additionally, the report highlighted Dollar General’s expansion from about 16,000 stores in 2019 to approximately 20,000 stores, indicating that this growth has not strengthened its competitive position. Analysts suggested that Dollar General should consider halting new store openings to refocus efforts on improving the performance of its existing store fleet.