Buy Dollar General (DG) Stock Ahead Of Earnings Amid Retail Strength?

Dollar General (NYSE:DG) shares have surged 45% in 2019, and retail titans from Target (NYSE:TGT) to Walmart (NYSE:WMT) have already posted strong Q3 results. So, let’s take a look at what’s going on with Dollar General and what to expect from its upcoming third-quarter earnings report to see if investors should consider buying the discount retailer’s stock.

Brief Retail Breakdown

Walmart, Target, Best Buy (NYSE:BBY) , and others have all posted stronger-than-expected Q3 financial results and projected strong holiday season sales, which helped continue to show that Amazon (NASDAQ:AMZN) encroachment fears where overblown.

There are, of course, many exceptions, including department stores such as Macy’s (NYSE:M) and Nordstrom (NYSE:JWN) . Plus, fellow discount powerhouse Dollar Tree (NASDAQ:DLTR) saw its stock price tumble after it fell short of earnings in late November and cut its outlook.

Despite negatives, the U.S. economy appears to be in a solid place amid some U.S.-China trade war progress. Overall, Q3 U.S. GDP growth was recently revised up and U.S. unemployment rests near its 50-year lows. And holiday season retail sales are projected to climb between 3.8% and 4.2%, which would mark strong improvement from last year’s 2.1% growth, according to the National Retail Federation.

DG Overview

Dollar General sells everything from food to motor oil for “everyday low prices,” unlike Dollar Tree’s $1.00 for everything. The Goodlettsville, Tennessee-based firm operates roughly 16,000 stores across 44 U.S. states in more rural areas. DG’s smaller stores vastly outnumber Walmart’s roughly 4,700 U.S. locations.

Dollar General has been able to thrive in the e-commerce age by expanding its brick and mortar footprint in areas where boxes of Amazon packages on doorstops aren’t the norm. This is not to say that DG management has not rolled out digital offerings.

The firm currently has a mobile app feature that enables customers to total up items in store to help them know exactly what they will pay at check out. On top of that, DG is testing out order online and pick up in store offerings. This has become popular at Walmart, Costco (NASDAQ:COST) , and many other retailers and could help Dollar General attract more young customers.

Investors should also note that the firm topped our Q2 estimates and provided an upbeat outlook. Plus, Dollar General plans to expand its reach to 46 states in 2020, with new stores in Washington state and Wyoming.

Q3 Outlook & Beyond

Moving on, our current Zacks Consensus Estimates call for DG’s Q3 revenue to jump 7.8% to $6.92 billion. This would come up just short of last quarter’s 8.4% sales expansion. Meanwhile, the company’s same-store sales growth is projected to climb 2.71%, which would fall short of Q2’s 4% comps growth.

Looking ahead, Dollar General’s full-year fiscal 2019 sales are projected to expand by 8% to come in at $27.67 billion. The discount retailer’s 2020 revenues are then expected to climb another 7.5% to hit $29.75 billion. Both of these would mark the continuation of strong top-line growth and come on top of 2018’s 9.2% revenue growth.

At the bottom end of the income statement, DG’s adjusted quarterly earnings are projected to pop 9.5% to reach $1.38 per share. Once again, this would come in below the second quarter’s 14.5% EPS expansion, which did top our estimate.

Better still, Dollar General’s adjusted full-year EPS figure is expected to climb 10.7% and 11.5%, respectively in fiscal 2019 and 2020.

Bottom Line

DG currently pays an annualized dividend of $1.28 per share for a 0.81% yield. Dollar General is also currently trading—as it has for the last three years—at a discount compared to its Retail Discount & Variety Market’s average of 23.7X forward 12-month Zacks earnings estimates at 21.7X.

Dollar General is currently a Zacks Rank #2 (Buy), based on its positive earnings revision activity. DG also boasts an “A” grade for Growth and a “B” for Momentum in our Style Scores system. And the company is part of our Retail Discount Stores industry—which includes Burlington Stores (MU:BUR) , Ross Stores (NASDAQ:ROST) , TJX (NYSE:TJX) , and others—that rests in the top 10% of our more than 250 Zacks industries.

DG shares have slipped slightly in the past month but are still up 45% in 2019. Therefore, some investors might want to take a chance on Dollar General before it reports. However, it is likely better to wait and see how Wall Street reacts and what DG’s guidance looks like even though its longer-term outlook appears strong.

Dollar General is set to report its Q3 financial results before the market opens on Thursday, December 5.

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