On Friday, Guggenheim maintained its Buy rating on Dollar General (NYSE: NYSE:DG) and increased the stock's price target to $165 from $160. The firm's analysis suggests that despite Dollar General's shares experiencing a 5.1% decline, in contrast to a 0.3% drop in the S&P 500, there are reasons for a positive outlook. This performance followed a first-quarter guide that was below consensus expectations, similar to the pattern observed with Dollar Tree (NASDAQ:DLTR) the previous day.
The report from Guggenheim indicates that the first-quarter margin pressures are understandable and are expected to improve in the second half of the year, particularly if the company continues to see strengthening in comparable store sales (comps). The current issues, such as efforts to mitigate shrinkage not yet being effective, higher year-over-year markdowns, and ongoing labor investments, are occurring while comps are below the level needed for financial leverage. However, the firm anticipates that these challenges will be temporary.
Guggenheim's stance is that initiatives to address shrinkage, including modifications to self-checkout procedures and product assortment changes, will lead to a multi-year period of growth exceeding algorithmic predictions. Applying this perspective to Dollar General's current EBITDA multiple of 11.8x, the firm sees a robust potential for stock price appreciation.
In its analysis, Guggenheim underscores the logic behind what it refers to as the "hockey stick" improvement, which is the expectation of a significant turnaround in performance in the latter half of the year.
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