Shares of Dollar General (DG, Financial) took a significant hit today, plummeting by 29.51%, and are currently trading at around $87.29. This drastic drop in stock value follows the company's disappointing financial results for the second quarter of 2024, which led to a sharp decline in investor confidence.
Investors' concerns were primarily fueled by Dollar General's revised full-year financial guidance. Initially, management projected net sales growth between 6% and 6.7% for 2024. However, the company has now tempered its forecast, anticipating growth of only 4.6% to 5.3%. For a company generating nearly $40 billion in annual sales, even these seemingly modest percentage changes hold significant weight.
Profitability has also taken a notable hit. In 2022, Dollar General posted full-year earnings per share (EPS) of $10.68. However, management has now slashed its EPS guidance for 2024 to a range of $5.50 to $6.20, marking a substantial decline. This bleak outlook has spurred a mass sell-off of Dollar General stock, driving it to levels not seen since 2017.
Several operational challenges compound Dollar General’s financial woes. The company is grappling with inventory issues, including increased damaged merchandise, theft, and the necessity for higher discounts. While management is implementing corrective measures, improvements are expected to take several quarters to materialize.
Furthermore, customer spending remains a critical concern. Dollar General's customer base largely comprises lower-income consumers, who have been disproportionately affected by inflation. This has resulted in curtailed spending, exacerbating the company's growth challenges.
From a valuation standpoint, Dollar General exhibits a price-to-earnings (P/E) ratio of 12.71, which suggests a relatively low valuation given its historical performance. Despite its current struggles, the company holds a GF Score of 84, indicating strong fundamentals in areas such as growth, profitability, and asset quality. The GF Value of Dollar General is estimated at $263.28, suggesting that the stock might be significantly undervalued. For more details, you can check the GF Value page of Dollar General.
Warning signs are also highlighted in the financial strength category, such as the company's Altman Z-score of 2.38, which places it in a grey area indicating potential financial stress. The operating margin has been in a five-year decline, averaging an annual drop of 3.6%. Additionally, Dollar General has been issuing new debt, amounting to $2.9 billion over the past three years.
On the positive side, the Beneish M-Score of -2.97 suggests that Dollar General is unlikely to be engaging in earnings manipulation. Moreover, the company's Price-to-Book (PB) ratio of 2.74 is close to its five-year low, indicating that the stock might be attractive from a valuation perspective. Despite its challenges, the defensive nature of Dollar General's retail operations could offer long-term resilience, provided the company effectively addresses its immediate operational and financial hurdles.
