Bank of America: Dollar General (DG.US) Continues to See Growth in Sales and Profit Margins, Reiterates "Buy" Rating

According to Jinse Finance, after Dollar General (DG.US) announced its second-quarter financial results, Bank of America reiterated its "Buy" rating with a target price of $135, based on continued sales growth and rising profit margins. At the same time, after Dollar General raised its full-year earnings guidance, Bank of America also raised its earnings forecast.

The company’s adjusted earnings per share for the second fiscal quarter was $1.86, higher than Bank of America’s expectation of $1.44 and the Wall Street consensus of $1.58. Same-store sales increased by 2.8% (higher than Wall Street’s expectation of 2.5%), customer traffic grew by 1.5% (compared to a 0.3% decline in the first quarter), and average transaction value per customer rose by 1.2%, with all categories achieving growth (including all non-core categories for two consecutive quarters). Gross margin was 31.3% (higher than Wall Street’s expectation of 30.5%), up 137 basis points year-over-year, due to higher inventory premiums and reduced losses, though partially offset by promotional expenses, discounts, and distribution costs. The selling and administrative expense ratio was 25.8% (higher than Wall Street’s expectation of 25.6%), up 121 basis points year-over-year, due to increased incentive compensation, repairs and maintenance, and benefits. EBIT margin was 5.6%, up 16 basis points year-over-year.

Dollar General raised its fiscal 2026 earnings per share guidance (now $5.80 - $6.30, previously $5.20 - $5.80) and same-store sales growth guidance (now 2.1% - 2.6%, previously 1.5% - 2.5%), with the lower end of the guidance range taking into account the possibility of greater consumer pressure throughout the year. Bank of America also raised its fiscal 2026 earnings per share estimate by $0.30 to $6.10, reflecting expectations for 2.5% same-store sales growth in 2026, continued gross margin expansion (with a more moderate growth rate in the second half of the year compared to the first half, especially in April due to more severe shrink, though shrink improvement continues to exceed planned levels), and selling and administrative expense pressure from incentive compensation and repairs and maintenance (especially in the 30th month, as most remodels are expected to be completed in that quarter and due to the timing of hurricane season).

Dollar General also continues to advance its trade-in program and increase core customer shopping frequency. Bank of America believes that as middle- and high-income groups continue to participate in trade-in transactions, Dollar General’s outlook will be supported, while core customers will also increase their spending at Dollar General (Bank of America believes that in a more challenging consumer environment, this trend may accelerate, and demand for low-priced products/pack sizes may increase). Store remodels are expected to create a "flywheel effect," not only driving sales growth but also reducing shrink, damage, maintenance, and disruptions across the store system.

Back-to-basics initiatives are effective, and Bank of America believes that back-to-basics measures (inventory reduction, product assortment optimization, distribution center resets, and display pack optimization) are working. Dollar General has multiple catalysts supporting gross margin growth (including strategic initiatives like the Dollar General Media Network and reduction of shrink and damage), as well as revenue growth/share gains (remodels, the return of non-consumables growth, continued digital/distribution expansion—including launching 1-to-1 same-day delivery service in 16,000 stores by year-end, up from the current 6,000).