Yesterday, middle- and high-income consumers seeking to cut costs helped Dollar General Corp.’s first-quarter performance. However, the outcomes meant more to UBS analysts.
As stated in a research note, “This was one of those prints that shifted the narrative,” according to UBS analyst Michael Lasser. “The conversation went from whether Dollar General can stage a recovery to, is Dollar General underearning its longer-run potential?”
The corporation was “only scratching the surface of what it could attain,” he said, after sales and earnings growth and an optimistic but possibly cautious future.
Nevertheless, despite reporting gains on Tuesday, Dollar General’s (DG) stock fell 1.2% on Wednesday.
According to Lasser, the chain is pushing for increased staff compensation and investing in shop renovations, which are expected to impact 20% of its sites annually. “After getting rid of 1,000 items last year, the chain is pruning those that aren’t selling well. We’re also seeing a stronger showing from online sales and the revenue we get from online advertisers,” he said.
Additionally, UBS emphasized Dollar General’s home and seasonal departments, specifically its partnership with Dolly Parton on a line of kitchenware. Through a grocery delivery relationship with the app, Dollar General’s first-quarter sales on DoorDash Inc. (DASH) increased by more than 50%. Dollar General intends to look at more collaborations and strategies to boost DoorDash sales, such expanding the number of locations that can use the service.
Stricter tariffs, however, can result in higher costs for Dollar General customers. During the chain’s earnings call on Tuesday, CEO Todd Vasos stated that the business would attempt to exercise consideration when determining whether to raise prices for customers.
“While the tariff landscape remains dynamic and uncertain, we expect tariffs to result in some price increases as a last resort, though we intend to work to minimize them as much as possible,” he stated.
Retailers have made similar statements in previous weeks. Direct imports typically accounted for a “mid- to high-single-digit” portion of Dollar General’s total purchases, according to Vasos. He went on to say that fewer than 70% of Dollar General’s direct imports came from China, the U.S.’s primary target in its global trade war, which is a decrease from previous levels. He also estimated that less than 40% of Dollar General’s indirect imports came from China.
Nevertheless, the rising cost of living continues to put a greater strain on Dollar General’s lower-income customers. Amazon.com Inc. (AMZN) and Walmart Inc. (WMT) are also fiercer rivals of the business; according to UBS, the latter is making greater investments in rural regions. Like other retailers, the business has had to cope with store safety issues and pressure to bolster its diversity pledges.
At least financially, Dollar General stated Tuesday that it anticipates 1.5% to 2.5% rise in same-store sales for its current fiscal year, which concludes on January 30. However, Lasser of UBS stated that he thinks such prediction might be conservative.
Despite more difficult comparisons from the previous year, he pointed out that Dollar General saw 2.4% increases in same-store sales during the first quarter. Additionally, he mentioned positive indicators for the second quarter of the business.
“I would anticipate with all the work that we’ve done, and depending on where the consumer falls, that we’ll continue to see comp momentum and, hopefully, traffic momentum as we move through the quarter and into the back half of the year,” Vasos stated during Dollar General’s earnings conference call.
Although Dollar General’s stock has increased by almost 47% so far this year, it has lost almost 17% in the last 12 months.
