Dollar General (NYSE:DG) has received a downgrade from JPMorgan, marking the worst rating the bank has ever given to the retail giant. The downgrade was announced after Dollar General's CFO Kelly Dilts and Director of Investor Relations Marianne Denenberg attended a JPMorgan conference in London on Wednesday.
JPMorgan analysts, led by Matthew Boss, reduced their rating on Dollar General to underweight from neutral and slashed their price target to $116 from $132. This decision came in response to concerns about the company's core low-end consumer demographic, which is already exhibiting recessionary behavior due to financial stress. The bank also predicted flat comparable sales growth for fiscal 2024.
The Dollar General stock fell 2% in premarket trade to $112.60 on Wednesday, marking a 53% decline this year. According to JPMorgan analysts, these consumers, with a household income of approximately $35,000, are grappling with multiple financial challenges. These include the near evaporation of pandemic-era savings, inflationary pressures amounting to roughly 12% on a two-year stack, and significant cuts in government assistance due to the expiration of the expanded child-tax care credit and reductions in the Supplemental Nutrition Assistance Program.
The middle-income cohort, with household incomes between $35,000 and $75,000, is also expected to exhaust their excess savings by fall 2023. They are now facing the resumption of student loan repayments, elevated interest rates, and higher fuel prices.
Despite these macroeconomic concerns, Dollar General executives remain hopeful about improving customer satisfaction and gaining market share through investments in store enhancements. Dilts stated that the Goodlettsville-based company aims for a return to historical operating profit growth over the next few years. However, margins that are already 200 basis points below 2019 levels may not improve due to elevated levels of shrink, a mix of lower-margin consumables, and potential markdowns.
JPMorgan's new price target for Dollar General is based on 15 times its fiscal 2024 earnings per share estimate, which Boss noted is the midpoint to Dollar General's pre-pandemic 13x to 18x multiple.
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