Analysts downgrade Dollar General shares after selloff

Investing.com -- Dollar General (NYSE:DG) shares plunged more than 32% on Thursday after the discount retailer reported second-quarter earnings and revenue that fell short of analyst expectations and significantly lowered its full-year guidance.

Following the plunge, analysts at both Morgan Stanley and Telsey Advisory Group downgraded the stock.

The company's struggles are largely tied to a weaker low-income consumer base and a tougher competitive landscape, which have made its growth path uncertain.

Morgan Stanley downgraded Dollar General from Overweight to Equal-weight, citing a "tougher path to growth" and lowering its price target from $170 to $100.

The investment bank's downgrade reflects concerns over the company's ability to drive the necessary 3% comparable sales growth to leverage expenses, with market share gains seeming unlikely in the near term.

Morgan Stanley noted the "top-line [was] pressured by a weaker low-income consumer," while the delayed margin recovery is a key issue, particularly as competition from giants like Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT) intensifies.

The firm also pointed out that Dollar General's earnings before interest and taxes (EBIT) margins could remain around 4.7%, far below the 8.4% margin seen in 2019, indicating a challenging outlook for profitability.

Telsey Advisory Group also downgraded Dollar General, moving its rating from Outperform to Market Perform and lowering the price target to $103 from $168 a share.

Telsey highlighted that while Dollar General's core lower-income customers are visiting stores more frequently, they have less money to spend, especially as they near the end of their pay periods.

Additionally, middle-income customers, who typically trade down during tough economic times, are not doing so as expected. Instead, these customers are increasing their spending at competitors like Walmart and other discounters.

Telsey also noted that Dollar General has been forced to increase promotions to attract consumers, further squeezing margins.

Both firms underscore the growing competitive pressures and the uncertain path to recovery for Dollar General, making its outlook more cautious.