Dollar General's brand is showing some cracks and may be a warning sign ahead of earnings

Published Tue, Mar 12 202411:35 AM EDTUpdated Tue, Mar 12 202411:48 AM EDT

Christina Cheddar Berk @in/christina-cheddar-berk-b864404/

Dollar General shares have been on the rise this year as investors bet that the discount retailer is making progress turning around its business. But earnings on Thursday could reveal a more mixed picture, putting the stock at risk. A crowd-sourcing firm that has accurately spotted trends at other retailers like Target is seeing renewed weakness at the dollar store chain. HundredX collects data on brands by partnering with organizations to get consumer feedback in return for funding charitable causes. In collecting this data, the firm saw a deterioration in the Dollar General brand last year. After a management shake-up last year, sentiment improved, but took a sharp downturn in February, the firm's data suggests. The souring of consumer feelings about the brand is worth noting ahead of Dollar General's fiscal fourth-quarter earnings report due out on Thursday, especially given the nearly 19% surge in the stock since the start of the year. Last year, Dollar General shares plunged 45%. As of Monday's close, Dollar General's stock is up more than 57% from a 52-week low of $101.09 reached in mid-October. On average, analysts surveyed by FactSet have a price target of $1412 on the stock, which implies shares could fall 12% from their $159.33 close on Monday. A little more than a third of analysts rate it the equivalent of a buy. DG 1Y mountain Dollar General shares over the past year. Vasos' challenge Part of what's been driving up the stock is a bet on the steps CEO Todd Vasos has been taking to improve the business since returning in October from retirement. Vasos replaced Jeff Owen, who had been at the retailer for less than a year. Under Owen's watch, Dollar General had racked up millions in fines from the Occupational Safety and Health Administration for violations of worker safety, which included hazards such as blocked emergency exits. Sales were also slumping as shoppers avoided the stores, which they saw as dirty, and where unwanted merchandise overflowed some displays, while other shelves remained bare. Thinly staffed stores resulted in boxes cluttering the aisles. The HundredX survey looked at 16 factors that customers value in a dollar store such as price, selection, speed at checkout, cleanliness and product availability. Compared with its peers such as Dollar Tree , Five Below , Big Lots , Family Dollar and Ollie's Bargain Outlets , Dollar General didn't top any of the attributes that shoppers value. Gordon Haskett analyst Chuck Grom said Vasos has tried to move quickly to improve trends by slowing store openings and hiring more workers to make sure shelves are stocked. Vasos is also getting rid of unprofitable inventory by reducing the number of items it sells and cracking down on "shrink," which occurs either through theft or products being damaged. In a research note published in mid-February, Grom said his firm's quarterly store manager survey found "encouraging green shoots that bode well longer term for a company in transition." "While the benefits of these initiatives will take time to show up in the financial results, our survey shows some early progress is being made," Grom said at the time. However, the HundredX data suggests consumers aren't seeing the changes yet. Their research found that consumers felt the cleanliness of Dollar General's stores, a top five driver of satisfaction, lagged key peers Dollar Tree and Family Dollar, and fell 2% further in February. The favorability of Dollar General's selection also has been on the decline. Until November, shoppers rated Family Dollar and Dollar General's product offerings more or less on a par with each other. Since then, Dollar General now lags its rival and the gap has been widening, the firm said. Fourth-quarter expectations Piper Sandler analyst Peter Keith expects to see a solid fourth-quarter report from Dollar General, but he suspects the consensus earnings estimate for fiscal 2024 is too high. He anticipates there could be some disappointment regarding the outlook, when it is issued later this week. Keith, who has a neutral rating on the stock, expects Dollar General will earn $1.66 per share in the fourth quarter, which is below the FactSet consensus of $1.73 per share. For 2024, he is "a bit cautious" and projects the retailer will earn $7.04 per share, far below the average estimate of $7.42 per share, according to FactSet. "All in, we are encouraged with the stabilization in fundamentals and (what looks to be) improving comp trends," Keith said, referring to sales in stores open at least 12 months, a key retail metric. "However, we still view 2024 as a relatively flat EPS growth year." In addition to Dollar General's own challenges, all dollar stores are likely being hurt by weaker spending among low income consumers. There has been a slow start to tax refund payments this year as well as a drop off in SNAP, or "food stamp," payments. Both are headwinds for discounters. But Morgan Stanley analyst Simeon Gutman expects the sector has been benefiting shoppers feeling very cautious about their spending. For Dollar General, specifically, Gutman expects fourth-quarter earnings to match estimates. He expects same-store sales to have fallen about 1% in the latest quarter. "We think expectations are for a 0%-2% comp guide (in-line with consensus), which seems reasonable assuming ~flat ticket and a slight improvement in units/traffic throughout the year," he wrote in a research note in late February. He anticipates the company's 2024 forecast will be "somewhat more conservative in the $6.80-$7.00 range." UBS analyst Michael Lasser expects Dollar General's fourth quarter "is likely to suggest there is still more work to be done but its actions are gaining traction." He's on the more upbeat end of estimates, with a prediction that the company will estimate fiscal 2024 earnings of $7.00 to $7.50 per share and 0% to 2% same-store sale growth. His own estimate calls for 2024 profit of $7.30 per share and comparable sales growth of 1.4%. Lasser expects Dollar General will need to boost spending further to attract and retain workers. "For now, we think DG's shares will be volatile. But, we think the stock has a compelling path for upside over a multi-year period," he said. JPMorgan analyst Matthew Boss also expects strong trends for Dollar General over a longer-term horizon. He upgraded the stock to neutral on Tuesday, saying management is looking at "every element" of the business to return to historic levels of profitability. Boss expects same-store sales are improving and could rise at a low-single digit pace in the first quarter of fiscal 2024. —CNBC's Michael Bloom contributed to this report.