Goldman Praises Dollar General's Consistent Top Line, Cost Control

Goldman Sachs reiterated its Buy rating on Dollar General Corp. DG and raised its price target by $5 to $97, implying 10 percent upside, after the company delivered double-digit EPS growth in its first quarter.

Quarterly Results

Better cost controls and consistent top line led the Goodlettsville, Tennessee-based discount retailer to report 23 percent growth in its first quarter EPS to $1.03, above Goldman Sachs'/consensus estimate of $0.95.

Same-store sales were 2.2 percent, lower than Goldman Sachs'/consensus estimate of 2.5 percent/2.4 percent), but still solid relative to broader retail.

Related Link: Dollar General Gains 4% Following Q1 Results

Dollar General reiterated its yearly long-term earnings algorithm at 10–15 percent EPS growth.

SG&A leveraged 27bp (versus Goldman Sachs' estimate for 15bp of deleverage) on lower utilities, payroll related, marketing costs and higher volume of customer cash back transactions. "Gross margin was up 16 bps, driven by higher initial markups and lower freight costs," analyst Stephen Grambling wrote.

"Mild weather helped drive lower utility costs. SG&A per sq. ft. declined yoy in 1Q, a positive read for DG's ZBB roll out," Grambling added. The analyst sees 13bp of gross margin expansion in FY16 driven by better freight costs and higher initial markups.

Expectations

Grambling also raised his FY16/17/18 EPS estimates to $4.70/$5.23/$6.07 from $4.63/$5.21/$6.05. The increase was driven by ongoing gross margin opportunity and greater SG&A leverage as result of ZBB.

"We expect future beats vs. consensus to sustain the current multiple," Grambling said.