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Morningstar | Lackluster 3Q Earnings Do Not Materially Alter Our Targets for Dollar General

Although its year-to-date results are slightly behind our full-year targets, we do not expect to make a large change to our $107 per share valuation for narrow-moat Dollar General, as a time value of money-related adjustment should largely offset the impact of a tempered near-term outlook. The results do not lead us to question our long-term outlook, which calls for mid-single-digit annual revenue growth and high-single-digit adjusted operating margins over the next decade. We suspect the shares’ mid-single-digit percentage pullback after the earnings announcement was more a reaction to the rest of the market’s swoon rather than the earnings report itself. Still, while our view of the firm remains favorable, we believe that prevailing sentiment largely reflects its positive prospects, leading us to recommend investors await a more attractive entry point.

After 2.8% third-quarter comparable sales growth (against our 3% target), Dollar General has seen 9.4% top-line expansion against an 8.0% operating margin year to date. In fiscal 2018, management now calls for 9.0% revenue growth (from 9% to 9.3%) and slightly lower operating margins for the year (previously flat) leading to diluted EPS guidance that fell slightly to $5.85 to $6.05 from $5.95 to $6.15 (relative to our 9%, 9%, and $6.13 pre announcement expectations).

Dollar General's fairly strong results come despite rising wages and freight costs. We believe these pressures and the competitive environment will keep operating margins near fiscal 2017's 9% level (relative to a 10% average from fiscal 2011-16), though costs should lever as the chain continues its growth. We expect Dollar General's advantaged store network (generally located in smaller towns and rural areas where it is the only convenient, sizable general retailer) to allow the firm to post consistent results even amid fierce competition.