Buy Dollar General (DG) Stock Before Q1 Earnings After Target Soars?

With results from roughly 72% of the retail sector of the S&P 500 already out, investors have a solid understanding of the overall earnings picture. Plus, with strong reports from Target (NYSE:TGT) and Walmart (NYSE:WMT) , some investors might be looking for ways to benefit from retailers as Q1 earnings season slowly comes to an end. Therefore, it’s time to see if investors should consider buying Dollar General (NYSE:DG) stock heading into earnings?

Retail Overview

Walmart last week saw its U.S. comp sales pop 3.4%. This marked its strongest Q1 growth in this vital retail category in nine years and the fourth straight period of 3% or better comps expansion. Walmart, like its peers Target, Costco (NASDAQ:COST) , and Kroger (NYSE:KR) , has also rolled out a series of digital and delivery offerings over the last few years. Meanwhile, Target posted 4.8% comparable sales growth in the first quarter, with traffic up 4.3%. Plus, the Minneapolis-based retailer’s digital sales soared 42%.

However, department stores like Macy’s (NYSE:M) , J.C. Penney (NYSE:JCP) , Kohl's (NYSE:KSS) , and Nordstrom (NYSE:JWN) have struggled to adapt to the Amazon (NASDAQ:AMZN) retail age. As of Wednesday, Q1 results from 71.8% of the Retail sector stocks in the S&P 500 were out, with total earnings and revenues for the sector up +13.7% and +8.3%, respectively. Going forward, Wall Street will be paying close attention to see how the recently escalating trade war between the U.S. and China impacts retailers (also read: Retail Sector Fails to Impress).

For reference, total Q1 earnings for 468 S&P 500 members that have already reported are up +0.1%. On top of that, revenues were up 4.8%, with 76.7% beating EPS estimates and 59.6% beating revenue estimates. Clearly, the retail industry has outperformed the broader market so far.

Dollar General Overview

The Goodlettsville, Tennessee-based company operates roughly 15,400 discount retail stores around the U.S. Although its name might suggest otherwise, Dollar General does not sell its range of grocery, beauty, health, cleaning, and various other offerings for $1. Instead, Dollar General simply sells things at big discounts compared to higher-end stores.

Dollar General is rolling out more fresh-food items and has started to introduce digital initiatives, such as an app that allows shoppers to scan products to help keep track of how much they are going to spend at checkout. The firm is also experimenting with e-commerce strategies to see what works best for its core lower-income customers.

With that said, shares of DG have lagged its industry in 2019, up roughly 12% compared to over 15% industry expansion. The firm’s underperformance can be blamed partly on the fact that Dollar General expects to spend about $50 million this year to expand its footprint and bolster its business, which will eat into profits. Shares of DG closed regular down 1.15% on Thursday at $120.65, roughly 5% off their 52-week intraday highs.

Outlook & Earnings Trends

Looking ahead, our current Zacks Consensus Estimate calls for the firm’s first-quarter revenue to jump 7.4% to reach $6.56 billion. This would mark a slowdown compared to last quarter’s 8.5% top-line expansion and fiscal 2018’s 9.2% overall revenue growth.

At the bottom end of the income statement, the firm is projected to see its adjusted earnings climb 2.21% to reach $1.39 per share. Last quarter, the company’s adjusted EPS figure surged over 24% to $1.84 per share, which did fall below our $1.88 estimate.

Over the past four quarters, DG has only topped our quarterly earnings estimate once. The company’s earnings estimate revision activity has also been mixed recently, and its consensus estimates are down big compared to its pre-fourth quarter release figures.

Bottom Line

Dollar General has committed money on growth projects, which is projected to impact its bottom line. With that said, DG is a Zacks Rank #2 (Buy) at the moment that sports an “A” grade for Growth and a “B” for Value in our Style Scores system.

Dollar General is trading at 18.4X forward 12-month Zacks Consensus EPS estimates. This marks a discount compared to its industry’s 25.9X average, but does rest above its own 10-year median of 15.8X. DG’s price/sales ratio of 1.23 is relatively comparable to Dollar Tree’s (NASDAQ:DLTR) 1.04 and comes in below Ross Stores’ (NASDAQ:ROST) 2.32 and TJX Companies’ (NYSE:TJX) 1.59.

Investors should always be mindful about buying stocks before earnings, as it’s never clear how Wall Street will react to even the ‘best’ reports. Yet, this dividend payer, with a yield of 1.05% at the moment, might be one to consider heading into earnings.

Dollar General is scheduled to release its first-quarter fiscal 2019 financial results before the market opens on Thursday, May 30. Make sure to come back to Zacks for a breakdown of the firm’s actual quarterly metrics.

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