Goldman Sachs Reiterates CL-Buy on Dollar General (DG) Heading Into Q1 Print

Goldman Sachs reiterated a Conviction Buy rating on Dollar General (NYSE: DG) with a price target of $72. Analyst Stephen Grambling adjusted estimates ahead of Q1 results Tuesday. Overall, he remains positive.

"DG will report 1Q EPS on Tuesday, June 3, BMO. Ahead of results we lower our 1Q comp estimate to 2% (vs. prior 2.5%) given lingering weather headwinds and a difficult macro backdrop for low income consumers. Our 1Q EPS estimate of $0.73 is unchanged and in line with consensus. We embed 50bp of gross margin pressure and 30bp of SG&A deleverage, driving operating margin down yoy. Despite a challenging 1Q we believe management will reiterate FY14 EPS guidance and point to better top-line trends in April/May as weather normalized," said Grambling.

"While the stock has come under pressure on competitor downgrades, weaker 1Q results across retail, and headwinds facing low-income consumers, we remain constructive on DG’s prospects looking forward:

*Comps poised to accelerate – We expect convenience-oriented trips were eliminated in favor of stocking up amid inclement weather. We also anticipate tobacco attachment rates will improve even as the initial rollout is lapped.

*Gross margin stabilization – Tobacco pressure abates in 2H and shrink improvements should materialize. Promos are up but DG has weathered more competitive environments (2012) while balancing sales and margins.

*Valuation undemanding – Shares trade at 15X NTM EPS, a 5% discount to their 5-year average of 15.7X and a 6% discount to the S&P 500. In our scenario analysis, we demonstrate a combination of trough fundamentals plus trough valuation would only correspond to 14% downside from here," he said.

For an analyst ratings summary and ratings history on Dollar General click here. For more ratings news on Dollar General click here.

Shares of Dollar General closed at $53.78 yesterday.

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