Dollar General (NYSE:DG) shares fell as Morgan Stanley downgraded the discount retailer’s stock to equal weight from overweight on Sunday, citing its “thesis-shifting quarter.” When reporting quarterly financials last week, the company said a challenging economic environment prompted on a miss on earnings and a cut to full-year guidance.
The firm warned there are too many uncertainties on the discounter on macroeconomic factors, market share, investments, execution, capital allocation, and near-term EPS power.
Analyst Simeon Gutman and team believe DG's value proposition in its core rural markets is still largely intact, even with some modest cracks emerging, but does not see enough catalysts in the near term to stay bullish.
"We cannot confidently recommend the stock here given the growing uncertainties and unknowns to the DG story and catalyst path. Unlike in past moments when DG underperformed but presented attractive "buy-the-dip" opportunities ('16 macro headwinds, '17 investment cycle, '19 investment cycle), this period of underperformance reflects several, potentially interrelated cross-currents at once that likely inhibits a quicker rebound in the equity in the next 6-12 months."
Morgan also sees increased risk to the EPS estimates on Dollar General with more price investments and labor inflation potentially in the mix.
Morgan Stanley cut its price target on Dollar General to $180 from $235.
DG shares nicked up three cents to $166.12.
