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No Bang for Buck: Dollar General Beats, Stock Slumps

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Part 4
No Bang for Buck: Dollar General Beats, Stock Slumps PART 4 OF 6

Dollar General Raises Fiscal 2017 Guidance but Misses Wall Street Expectations

DG management raises fiscal 2017 guidance

Dollar General’s (DG) management retained its fiscal 2017 outlook for 5%–7% growth in total sales in its fiscal 2Q17 results on August 31. However, DG raised its comps (comparable same-store sales) guidance and now expects its comps to touch the upper end of the 0%–2% guidance range.

The discount retailer also raised the lower end of its full-year earnings outlook by $0.10 and now expects EPS to lie within the $4.35–$4.50 range. At the midpoint, this reflects a 1.2% fall from the previous year’s earnings.

Dollar General Raises Fiscal 2017 Guidance but Misses Wall Street Expectations

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Wall Street had higher expectations from the company, as analysts have been projecting $4.51 for DG’s fiscal 2017 EPS. This translates into a 0.6% YoY (year-over-year) jump in earnings.

Comparing valuations and earnings potential

DG is currently trading at a one-year forward PE (price-to-earnings) ratio of 15.2x, compared with its three-year average of 17.2x. Dollar Tree’s (DLTR) PE ratio is higher at 16.4x. The two companies had similar valuations before the drop in Dollar Tree’s stock price after its 2Q17 results.

While Dollar Tree has a slightly higher valuation, it has a better near-term earnings potential than Dollar General. Its EPS is expected to rise ~19% over the next 12 months (NTM), compared with the expectation of 5.7% growth for Dollar General’s EPS over the next 12 months.

Both companies are trading at a discount to variety store chains TJX Companies (TJX) and PriceSmart (PSMT), which have PE ratios of 17.5x  and 25.2x, respectively. Mass merchandisers Wal-Mart Stores (WMT) and Costco Wholesale (COST) are trading at PE ratios of at 17.4x and 25.3x, respectively.

Investors looking for exposure to Dollar Tree and Dollar General can consider investing in the SPDR S&P Retail ETF (XRT), which invests 2.5% of its total holdings in the two companies.

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