Dollar General Earnings: Problems Reflect Pressured Core Clientele, Not Fundamental Weakness

For the second straight quarter, narrow-moat Dollar General posted lackluster earnings, cut its guidance, and was punished by the market for its shortcomings. The firm's core customer remains under pressure, acutely sensitive to sticky inflation in nondiscretionary expenses, and pulled back on purchases in the more cyclical seasonal (negative 1%), home goods (negative 7.7%), and apparel (7%) categories in response. While we expect to lower our own $191 intrinsic valuation by a mid-single-digit percentage—consistent with higher-than-expected shrink, a 2.25% reduction in full-year revenue guidance at the midpoint (to 1.3% to 3.3% from 3.5% to 5%), and a material downgrade in expected profitability—we continue to view issues as ephemeral rather than structural and see significant long-term opportunity in the name.