Sell Dollar General as consumers come under pressure from higher inflation, JPMorgan says in downgrade

Published Wed, Sep 20 20237:13 AM EDTUpdated Wed, Sep 20 202311:18 AM EDT

It's time to dump shares of Dollar General as consumers come under increasing pressure, according to JPMorgan. Analyst Matthew R. Boss downgraded shares to underweight from neutral, saying the company's core low-to middle-income shopper is under strain from diminishing savings and rising inflation. The downgrade comes after JPMorgan hosted a recent fireside chat with Dollar General Chief Financial Officer Kelly Dilts. "DG's core low-end consumer (HHI $35K) is already at a stress point acting recessionary today given the combination of (i) pandemic-related savings diminished mid-Summer, (ii) persistent inflationary pressures (+12% 2-yr stack in August), and (iii) government assistance reduced by ~$40B in March/April (child tax care credit expiration drove tax refunds -20% / SNAP cut of ~$90/month)," Boss wrote in a Wednesday note. "Compounding matters, management sees excess savings for the middle-income cohort ([household income] of $35K-$75K) on pace to be depleted by the end of Fall '23" because of student loan repayments, higher interest rates and rising fuel prices, Boss added. DG 1D mountain Dollar General shares 1-day All this charts an uncertain path forward for Dollar General, the analyst said. Shares are already lower this year by more than 50% and have plunged roughly 16% just this month. On Aug. 31, the stock dropped 12% after Dollar General reported weaker-than-expected second-quarter results. As of Tuesday, the stock is on pace for its eighth-straight week of losses. The analyst's $116 price target, down from $132 previously, is about in line with where shares closed Tuesday at $115.10. The stock was down another 1.1% during premarket trading Wednesday. "On the bottom-line, CFO Dilts is targeting a return to historical operating profit growth 'over the next few years' (albeit not explicitly in 2024) clarifying that 'operating margin expansion' is not a commitment for FY24 or multi-year at this point despite margins ~200bps below FY19 levels," Boss wrote. — CNBC's Michael Bloom contributed to this report.