Dollar General’s Results Snowed in by Winter Storm Elliott

We don’t plan any material change to our $212 per share fair value estimate for narrow-moat Dollar General DG after digesting preliminary fourth-quarter results that were softer than expected. But after a mid-single-digit rout in the share price, we view the stock as fairly valued. Fourth-quarter same-store sales growth of 5.7% was a touch below our 7% projection and the firm’s 6%-7% outlook, but the updated EPS forecast of $2.91-$2.96 was 9% below the midpoint of the prior range ($3.15-$3.30) and our implied $3.25 estimate. Fortunately, the shortfall is not due to fundamental weakness in the business, but rather from the idiosyncratic impact of Winter Storm Elliott, which strangled the northern U.S., hindering sales and prompting increased damages to inventory. Given the transitory nature of weather events, we don’t think this affects the durability of Dollar General’s brand asset or cost edge.

While an initial fiscal 2023 outlook provided a same-store sales projection of 3%-3.5% that is in line with our 3.5% estimate, Dollar General’s anticipated EPS growth of 4%-6% is significantly lower than our 14% forecast. Fiscal 2023 is also affected by factors unlikely to repeat, including a 4-percentage point drag from the firm’s 53rd week in fiscal 2022 and higher interest rates, which are providing at 3-percentage point headwind on diluted EPS. We surmise these expenses could be lighter than expected by the end of 2023, as our internal forecast for the federal-funds rate at 2023 year-end is 3.75%-4%, lower than the more than 5% rate the Federal Reserve is currently signaling. As lower borrowing costs would also benefit consumers, we surmise this will help restore growth to Dollar General’s customer base, supporting our long-term sales outlook of 6.5% and low-double-digit EPS growth. We await the dissemination of full fiscal 2022 results on March 16.