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Comp Headwinds Persist For Dollar General, BMO Downgrades

Wayne Hood of BMO Capital Markets turned incrementally bearish on Dollar General Corp. DG 2.16% and downgraded the stock to Market Perform from Outperform with a price target slashed to $78 from a previous $95 after a "disappointing" second quarter earnings print.

Hood's downgrade was mostly attributed to Dollar General's same-store sales growth of just 0.7 percent, which fell short of his 2.5 percent estimate and the Street's consensus estimate of 2.7 percent.

Hood also noted the following also played a part in his downgrade thesis:

  • 1) Aggressive proactive price action in key markets on 450 traffic-driving items is under way and likely to be expanded
  • 2) The price adjustments will "take time to resonate with consumers" and create a lag in same-store sales acceleration versus gross margin pressure
  • 3) Deflation in key categories and a reduction in SNAP benefits hurt same-store sales by 60 to 70 basis points
  • 4) Disruption from the Dollar Tree-Family Dollar merger "is likely to lessen" which makes it more difficult for Dollar General to grow its market share
  • 5) Wal-Mart's price investments could adversely impact key seasonal items
  • 6) Store checks have created worries over growing clearance inventory, and 7) FLSA costs related to overtime will have a $0.03 to $0.04 impact to its earnings per share in the fourth quarter and $0.06 per share throughout 2017.

Bottom line, the factors Hood noted resulted in a reduction in his earnings per share expectations for 2016 from $4.66 to $4.44 and 2017's earnings per share expectations from $5.42 to $4.88.

DateFirmActionFromTo
Aug 2016MacquarieMaintainsOutperform
Aug 2016UBSMaintainsBuy
Aug 2016BMO CapitalDowngradesOutperformMarket Perform

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