Discount retailer Dollar General Corporation (DG) provides various merchandise products in the southern, southwestern, midwestern, and eastern United States. Its products include consumables, seasonal items, home products, and clothing. It is also expanding its healthcare focus through its DG Wellbeing initiative.

On August 23, the company’s Board of Directors declared a quarterly cash dividend of $0.55 per share on the common stock, payable on or before October 18, 2022. Also, under its share repurchase program, the company purchased 1.5 million shares of its common stock for $349 million in the second quarter of 2022.

Consumers are rushing to discount retailers with rampant inflation and rising interest rates. This trend and the expanding reach of DG's stores should boost its performance.

The stock has gained 10.7% over the past year and 9.1% over the past six months to close its last trading session at $241.62.

Here's what could shape DG's performance in the near term:

Latest Development

In July, DG announced plans to build three new distribution centers in North Little Rock, Arkansas, Aurora, Colorado, and Salem, Oregon. At full capacity, the facilities are expected to create up to 1,100 job opportunities and represent a combined investment of approximately $480 million. Each state-of-the-art, approximately one million square foot facility, will also support the company's growing DG Private Fleet presence.

Robust Financials

During the second quarter ended July 29, 2022, DG's net sales increased 8.9% year-over-year to $9.43 billion. Its operating profit grew 7.5% from the year-ago value to $913.43 million. The company’s net income surged 6.4% from the prior-year quarter to $678.03 million, while its EPS amounted to $2.98. In addition, its same-store sales increased 4.6% in the current year.

Impressive Growth Prospects

Street expects DG's revenues and EPS to rise 10.7% and 13.8% year-over-year to $37.89 billion and $11.57, respectively, in fiscal 2022. In addition, DG's EPS is expected to rise at an 11.4% CAGR over the next five years. Moreover, the company has an impressive earnings surprise history, as it topped Street EPS estimates in three of the trailing four quarters.

Strong Profitability

DG's trailing-12-months net income margin of 6.6% is 11.9% higher than the industry average of 5.9%. Also, its ROC, ROE, and ROA are 35.3%, 150.8%, and 61% higher compared to the respective industry averages. Furthermore, its asset turnover ratio of 1.32% is 27.3% higher than the industry average of 1.03%.

Consensus Rating and Price Target Indicate Potential Upside

Of the 17 Wall Street analysts that rated DG, 13 rated it Buy, and four rated it Hold. The 12-month median price target of $276.31 indicates a 14.4% potential upside. The price targets range from a low of $258.00 to a high of $296.00.

POWR Ratings Reflect Solid Prospects

DG has an overall grade of B, equating to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. DG has a B grade for Stability which is justified given the stock beta of 0.41.

Of the 38 stocks in the A-rated Grocery/Big Box Retailers industry, DG is ranked #25.

Beyond what I stated above, we have graded DG for Growth, Value, Sentiment, Quality, and Momentum. Get all DG ratings here.

Bottom Line

Economic uncertainty and persistent inflation should significantly boost DG's sales ahead of the holiday season. In addition, given the solid fundamentals, expansion strategies, and a loyal customer base, the stock could soar in the near term. So, we think the stock could be a great buy now.

How Does Dollar General Corporation (DG) Stack Up Against its Peers?

DG has an overall POWR Rating of B, which equates to a Buy rating. Check out these other stocks within the same industry with A (Strong Buy) ratings: Albertsons Companies Inc. (ACI), Ingles Markets Inc. (IMKTA), and Kroger Co. (KR).

DG shares were trading at $237.27 per share on Monday afternoon, down $4.35 (-1.80%). Year-to-date, DG has gained 1.26%, versus a -22.54% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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