Goldman Sachs updated its U.S. Conviction List, adding Dollar General (NYSE:DG), Philip Morris International (NYSE:PM), S&P Global (SPGI), and Woodward (NASDAQ:WWD) while removing Constellation Brands (NYSE:STZ), Edwards Lifesciences (NYSE:EW), Jefferies Financial Group (JEF), and Textron (NYSE:TXT).
According to Goldman Sachs, Dollar General presents a "defensive turnaround story at an inflection point" despite recent pressures. The firm has a 12-month price target of $169 on the stock.
The investment bank notes that Dollar General has faced challenges, with its stock down approximately 11% in July.
Analysts explain that concerns have centered around the low-income consumer market, competition from Walmart (WMT), and the investments required for DG to remain competitive.
However, Goldman Sachs believes these concerns are exaggerated. The firm states that the company's "back to basics" initiative is driving improved results and that DG is "better positioned, and more defensive, than investors think."
The analysis indicates that the low-income consumer segment is stable. Goldman Sachs' proprietary work, supported by survey data, Placer.AI, and a recent field trip, suggests that while consumers are benefiting from lower gas prices, they are also facing challenges due to inflation and tighter credit access. Nevertheless, they state that overall sentiment is that low-income consumers remain employed and resilient.
Dollar General's defensiveness is attributed to its strategic location in rural areas, limited competition, and commitment to low prices.
Goldman Sachs points out that DG generates 80% of its sales from essential consumables like food and household products, making it less susceptible to economic downturns. This, coupled with a positive consumer sentiment, is said to position DG strongly against competition.
Furthermore, the bank highlights that Dollar General is addressing issues like shrink and believes the stock reflects these efforts. They anticipate significant improvements in shrink costs towards the end of FY24 into FY25 and foresee margin and earnings expansion as store upgrades are completed.