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Dollar General Q3 Earnings on Deck: Can DG Stock Reach New Highs?

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Dollar General (DG - Free Report) is set to report its third quarter earnings before the market opens on Thursday, December 5. The discount retailer has put together a solid year as its shares have climbed 42% in 2019.

DG stock currently trades around 8% below its 52-week high of $166.98 per share and a strong quarterly report could potentially send it soaring to new highs.

However, some investors are worried that Dollar General might suffer the same fate as rival discount retailer, Dollar Tree (DLTR - Free Report) , which failed to impress Wall Street recently.

Can Dollar General Sustain Growth?

Dollar General separates itself from its rival Dollar Tree through its multiple-price-point business model and through DG market, which is its grocery brand. These two facets help Dollar General maintain its strong position in the discount retail market.

Dollar General has also launched a number of new initiatives this year. This includes its decision to bring its supply chain in-house, adding more fresh food options, and introducing more private-label goods. The retailer has invested around $55 million into its new programs, with the bulk of the money going into DG Fresh and Fast Track.

DG Fresh allows the retailer to more efficiently distribute fresh and frozen produce to its stores. Meanwhile, Fast Track is a new self-checkout initiative that can make shopping more efficient for consumers and also help better structure Dollar General’s operations.

The company’s Fast Track initiative can potentially dramatically improve consumer satisfaction as check-out times are often noted as a negative aspect of a customer’s experience at retailers. Dollar General is piloting the initiative in select stores.

Fast Track also aims to improve the logistics of its products from warehouse to stores. The company plans to optimize the way trucks are packaged and unloaded at stores by providing its items with shelf-ready packaging.

Outlook

Dollar General has been able to improve its operations and its top and bottom-line growth has impressed investors. The positive response to its programs helped Dollar General raise its fiscal 2019 guidance.

Our Q3 consensus estimates call for earnings to grow 9.5% to $1.38 per share and for net sales to climb 7.8% to $6.92 billion. Seasonal products are expected to lead the pack with 18.8% growth and consumables are projected to trail close behind with a 15.7% hike.

Comparable-store sales are projected to come in at 2.7% in the third quarter and around 255 net new stores are forecasted to be added in the quarter as well.

For the full fiscal year, our estimates predict a 10.7% earnings jump and a top-line leap of 8% to $27.67 billion. Meanwhile, same-store sales are anticipated to grow 2.9%.

Takeaway

Dollar General looks poised to continue its run and the discount retailer’s new initiatives seem ready to help more down the road. DG’s improved efficiency has helped the company open more stores at a time when many other retailers are scaling back their physical stores.

However, Dollar General’s YTD run has driven its valuation higher as it currently trades at 23X its forward earnings but is on par with the industry average of 23X. Its dividend only yields 0.83%, which may further discourage value investors.

While the valuation and dividend don’t seem too enticing, Dollar General can be a solid defensive move for those feeling wary of the broader economic picture as consumers could flock to discount stores in an economic downturn.

Dollar General sits at a Zacks Rank #2 (Buy) and has outpaced industry peers like Dollar Tree, Ross (ROST - Free Report) , and Burlington (BURL - Free Report) .  

Additionally, Target (TGT - Free Report) and Walmart (WMT - Free Report) have flexed their strength recently with impressive quarterly performances led by their digital sales growth. While Dollar General doesn’t have an ecommerce presence, it has around 10,000 more physical stores in the US than Walmart, which helps the company better reach the discount seeking consumers.

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