Why Dollar General Stock Got Clobbered by the Market Today

What happened

Shares of discount retail chain Dollar General (DG -19.24%) got clobbered by the market on Thursday after the company released its latest quarterly financial results. As of 11 a.m. ET, Dollar General stock was down almost 20%, hitting 52-week lows and wiping out about 3.5 years of gains.

So what

In Q1, net sales for Dollar General were up 6.8%, but this is largely because the company opened 212 new stores during the quarter. By comparison, same-store sales at locations open for at least 13 months were only up 1.6%. 

The size of the increase is significant, because prices are up, which led to the gain. By contrast, traffic at Dollar General is down, and that’s a problem.

Dollar General isn’t making more profit by increasing its prices; it’s merely trying to keep up with inflation. And with traffic down, stores are less profitable. The company’s diluted earnings per share (EPS) came in at $2.34 in Q1, down almost 3% despite the 6.8% increase in net sales.

With lower store traffic and waning profitability, the analyst community was lowering its price targets for Dollar General stock today, contributing to investors’ fears. 

Now what

Dollar General’s management expects Q1 trends to continue. It lowered its guidance for same-store-sales growth to 1% to 2%, compared with previous guidance of at least 3% growth. And it says that EPS could fall as much as 8% year over year in fiscal 2023, whereas it previously expected at least 4% growth.

With the business not performing as well as expected, management isn’t planning on repurchasing any shares in fiscal 2023 (it spent $2.7 billion repurchasing shares in fiscal 2022), and it’s opening fewer new stores than it previously planned.

It seems the market is right to be disappointed with Dollar General right now. That said, having earned $10.61 per share over the last 12 months, the stock trades at about 15 times its trailing earnings. That’s a well-below-average valuation, and it’s approaching Dollar General’s cheapest-ever valuation of 14.6 times earnings.

Therefore, this may be an opportunity to pick up shares of a proven winner at a discount price, despite the aforementioned challenges.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.