JPMorgan has downgraded Dollar General (NYSE:DG) stock from Neutral to Underweight, citing increasing financial pressures on the company's core low-to-middle-income consumers. The downgrade, announced Wednesday, was accompanied by a price target reduction to $116 from $132.
Matthew R. Boss, an analyst at JPMorgan, noted that Dollar General's core customer base is already showing signs of recessionary behavior due to diminishing pandemic-related savings and rising inflation. This assessment was made following a recent fireside chat with Dollar General's CFO, Kelly Dilts, hosted by JPMorgan.
Boss further highlighted that the financial strain on the company's middle-income customers (household income between $35K-$75K) is likely to intensify by the end of Fall 2023 due to factors such as student loan repayments, higher interest rates, and rising fuel prices.
The downgrade comes amid a challenging period for Dollar General, with shares already down more than 50% this year and having fallen roughly 16% this month alone. The company's stock dropped 12% on August 31 after weaker-than-expected second-quarter results were reported. As of Tuesday, the stock is on track for its eighth consecutive week of losses.
The Tennessee-based company has attributed its declining gross profit margin in Q2 - which slid to 31.1% from 32.3% a year ago - primarily to lower inventory markups and increased shrinkage among other factors.
Despite the current challenges, CFO Dilts has set a target for a return to historical operating profit growth over the next few years, although she did not explicitly commit to this for 2024. She clarified that "operating margin expansion" is not guaranteed for FY24 or beyond at this point, given margins are approximately 200 basis points below FY19 levels.
The Dollar General stock currently has 11 Buy recommendations, 16 Holds, and 3 Sells from various analysts.
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