Shares of Dollar General (DG -0.41%) rose early in Thursday's trading session, but then dropped fairly sharply. As of 12:52 p.m. ET, the discount retailer's stock was down by about 4.9% as the market digested the company's lackluster guidance for the coming year.
The end of a challenging year
In its fiscal 2023 (which ended on Feb. 2), Dollar General grew net sales by 2% to almost $39 billion. The top line was boosted by modest same-store sales growth of 0.2%, a notable drop-off from its same-store sales growth of 4.3% in fiscal 2022. The company's sales surged early in the COVID-19 pandemic, but have mostly plateaued since.
It seems as though Dollar General's management expected sales to continue to surge, which resulted in the company holding too much inventory. Those overstocked shelves have led to lower profits. Its full-year net income was $1.7 billion compared to $2.4 billion in fiscal 2022.
Slow sales and lower profits in 2023 are why Dollar General stock is still more than 40% below its all-time high. But its drop Thursday has more to do with its guidance for 2024.
A challenging year ahead as well
In its fiscal 2024, management believes that Dollar General will grow net sales by at least 6%, but expects its profit margins will continue to languish. The company is guiding for earnings per share (EPS) of $6.80 to $7.55. For perspective, it earned $7.55 per share in fiscal 2023. Therefore, management is guiding for flat EPS in a best-case scenario, even though it anticipates sales will rise.
I personally believe that Dollar General can navigate out of its current situation. But right now, it trades at about 20 times earnings, which seems fair considering management still has work to do to fix its profit margins.
Part of the problem at Dollar General is inventory, and inventory per store is down 1%. That's a start. But the market might not trust the company's turnaround plans until it sees better progress.
