On Aug. 31, Dollar General (NYSE:DG) released its second-quarter earnings results, for the period ending Aug. 4. The company's net sales rose by just under 4% to $9.8 billion but its operating profit fell by more than 24% to $692.3 million. The company's same-store sales, which is a key metric in the industry, was down 0.1% as Dollar General experienced a slow down in traffic.
The company said it "is taking certain actions to accelerate the pace of its inventory reduction efforts" as is still sitting on more than $7.5 billion in merchandise inventories, which is up from $6.9 billion a year ago. That's not great news for investors because it means that the company's margins could come under pressure if it becomes more aggressive with moving inventory (i.e. reducing prices).
And what's troubling is Dollar General still expects business to slow down. For fiscal 2023, it is now projecting between 1.3% and 3.3% net sales growth, which is down from its previous forecast of 3.5% to 5.0%. Diluted earnings per share will also be down between 22% to 34% whereas previously the company was expecting no worse than an 8% drop.
Dollar General's stock is now trading near its 52-week low of $128.48. At a price-to-earnings multiple of 13, the stock is trading at a much cheaper valuation than the S&P 500, where investors are paying an average of 20. But investors may be better off waiting for more of a dip in price as things could get worse for Dollar General's stock before they get better as the headwinds the company is facing don’t' appear to be subsiding.
