Of all the retail names traded in the markets, Dollar General Corp. (NYSE:DG) is among the most disappointing. Some companies within the embattled sector, such as J C Penney Company Inc (NYSE:JCP), are expected to do poorly because of lagging financials, fierce competition and the impact of Amazon.com, Inc. (NASDAQ:AMZN). But discount retailers typically serve an immediate need and are usually immune from online competition. Yet DG stock is up less than 5% for the year.
At this point, most retailers will take any bit of good news, even if it means conspicuously underperforming benchmark indices. In that respect, Dollar General is holding its own. But clearly, management needs to kick things into high gear if DG stock is going to remain a viable investment.
Shares are badly underperforming discount specialist Ollie’s Bargain Outlet Holdings Inc (NASDAQ:OLLI), which is up nearly 54% year-to-date. Additionally, big-box retailer Wal-Mart Stores Inc (NYSE:WMT) potentially makes Dollar General redundant.
One of the big misconceptions in the ugly retail markets is that only discretionary consumables are impacted. That sounds like a logical conclusion, given that financially stressed families will only purchase absolute necessities. Unfortunately, much pain exists. Whether we’re talking about the subprime loan crisis in the automotive sector or generic soda drinks, Americans are skimping everywhere.
While discretionary consumables experience the most dramatic declines, demand for discount retailers peaked in late 2011. Obviously, that bodes poorly for Discount General stock. And though Trump may boast about multi-year record low unemployment rates, cost-of-living expenses outpace wages for many Americans.
Again, unless you’re Amazon, doing business in retail simply stinks.
DG Stock Can Enjoy Near-Term Tailwinds
With all that said, investors shouldn’t count out Dollar General stock ahead of its second quarter of fiscal 2018 earnings report. Analyst consensus pegs DG’s earnings per share to hit $1.09, which is the exact same target for Q2 in the prior year.
DG stock came up short for FY 2017. However, the most recent two earnings reports delivered a pair of positive surprises to help reverse the negative momentum. Furthermore, traders are recently getting enthused about DG’s prospects. On a YTD basis, shares entered into the black starting from late July.
But the biggest potential catalyst for Dollar General stock comes courtesy of its fierce rival Dollar Tree, Inc. (NASDAQ:DLTR). Against an per-share earnings target of 87 cents, Dollar Tree instead delivered a tongue-in-cheek 99 cents. Just as importantly, revenues came in at $5.28 billion, beating out its $5.24 billion analyst estimate. The figure also exceeded its year-ago quarter’s haul of $5 billion.
If Dollar Tree’s results are anything to go by, DG stock should produce similar results for its Q2 report. I say that because DLTR provided updated estimates for its upcoming Q3 and full-year reports. Neither one of the revisions deviated from Wall Street’s original expectations. As a result, DLTR shares jumped substantially on the news, essentially saving its year so far.
Rivals rarely, if ever, root for each other. But in this case, I’m sure Dollar General made an exception.
Dollar General Stuck in a Shrinking Market
As a short-term speculator, the opportunity in DG stock ahead of its earnings report is enticing. But against a longer-term framework, I’m not seeing much promise.
Personally, I was taken aback by how horrible the retail environment has become. Equally surprising is how some brick-and-mortars managed to stand tall against various challenges. However, the underlying theme in retail is that the competition is consolidating. Simply put, too many players exist in this space.
That makes me pause on Dollar General stock. Although the company specializes in off-season and off-brand discounts, Walmart is encroaching on its territory. Such massive competition limits Dollar General’s ability to expand its business footprint. More critically, big-box retailers could make dollar stores irrelevant.
When purchased in bulk or on discounted promotions, several items are cheaper at Walmart than they are at Dollar General. Walmart also offers substantially more product categories, and quite frankly, their quality is superior, too. If the only thing that DG has to its advantage is price, that’s an advantage that won’t last long against the likes of WMT.
DG stock has upside potential. If the discount specialist puts up strong numbers for Q2 and gives reasonable guidance, shares could soar. But it’s hard to get enthusiastic about retail names, especially if there is nothing distinct about them other than price.
It’s going to take a lot more than bargains to survive this sector.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.