Dollar General (DG) - Get Dollar General Corporation Report faces rising wage pressures and mounting competition to open new locations, and that has prompted analysts to revisit their earnings assumptions for the discount retailer.
BMO Capital Markets this week reduced its earnings forecasts for 2017 to $4.70 a share from the prior $4.85, bringing what had been among the higher projections on the Street more in line with analysts' consensus.
The earnings revision has put pressure on Dollar General shares, pushing the stock down 1.43% Thursday to close at $71.01.
The two stocks often move in lockstep, as was evidenced in late summer last year, when earnings shortfalls caused steep declines in shares of both stocks.
Meanwhile, the two competitors are caught up in a race to expand their store count in order to maintain what amounts to an arms race in the discount merchandise retail space. Dollar Tree, which outbid Dollar General for the former Family Dollar store enterprise, is currently increasing its store openings pace. BMO said Dollar General likely opened approximately 900 stores in 2016, up from the 730 new locations it unveiled the prior year.
Dollar General is working to improve its retail facilities and its inventory standards, moves that are demanding the company spend more on wages. "(O)ur ongoing store visits lead us to believe there is likely to be more wage pressure than previously contemplated to maintain/improve store and inventory standards," BMO said in its note.
The firm laid out two scenarios it suggested could develop over coming quarters: Dollar General could find ways to grow its same store sales by 2.5% to 4%, which would allow the P/E multiple, currently trading just under 16 times, to move up to 17 times. That could drive the stock price up to $92 a share.
On the other hand, if same store sales growth misses a 2% target, and EPS growth falls short, the multiple could shrink to 13 times, and the stock target declines to $66.
"We are maintaining our market perform rating as we see 2017 SSS growth that is likely to fall at the low end of management targets of 2% to 4% and we see little room for Ebit margin and P/E expansion," BMO concluded.