Citi Downgrades Dollar General to Sell as Competitive Pressures Mount

In a significant shift, analysts at Citi have revised their outlook on Dollar General (NYSE: DG), downgrading the stock from Neutral to Sell while also slashing the price target from $91 to $73. This decision stems from growing concerns about Dollar General's performance in the upcoming fiscal years of 2023 and 2024, particularly regarding its modestly positive comparable sales growth.

Market watchers may find it intriguing that the anticipated EBIT margin for fiscal year 2024 is projected at just 4.7%. This represents a stark decline from the 8.4% margin enjoyed in 2019, despite the company now operating with a sales base that is roughly 50% larger than before. Unsurprisingly, shares of Dollar General reacted negatively, dropping over 2% in premarket trading.

Citi’s analysts have particularly pointed to a more challenging competitive landscape as one of the culprits behind this grim outlook. Over the past five years, Walmart (NYSE: WMT) has markedly strengthened its market position, posing a formidable challenge for Dollar General. “While DG has built a reputation for value, so has WMT, and it is becoming increasingly difficult for DG to compete on price,” the analysts noted. Both chains are also vying for the title of convenience champion; however, WMT has enhanced its game with improved omnichannel delivery solutions that cater to changing consumer demands post-pandemic.

The implication for stock traders is clear: competition is heating up, and Dollar General's prospects for recovery appear bleak. Analysts estimate that the EBIT margin may remain pressed between 4% and 5% in the years ahead unless the company can achieve over 3% in comparable sales growth—an outcome Citi does not expect anytime soon. The increasing need for competitive pricing, coupled with rising selling, general, and administrative (SG&A) costs, especially in labor, contributes to this challenging situation.