Dollar General Earnings on Deck – (NYSE:DG) Stock Eyeing Breakout

Dollar General Corporation (NYSE: DG) is set to release its latest earnings report this morning, with bulls eyeing a breakout from a range that has held for a number of months. Dollar General's stock price currently sits at $113 in the pre-market, up 2.83% on the session, following a 10% rally over the past month of trading.

Analysts anticipate an earnings per share (EPS) of $0.93 for the current quarter. This estimate represents a modest  increase compared to the $0.89 EPS reported in the same quarter last year. Revenue is expected to come in at $10.6billion on the period for a 4.12% growth rate Y/Y.

Dollar General's stock has delivered some solid outperformance over the past 52 weeks, gaining 38.23% against the S&P 500‘s own gain of 12.54%. Zooming out to the 5 year (-48.5%) or to the past 6 months, has presented a rather different picture however, with DG trading 1.68% lower on the period. The stock's beta of 0.29 suggests lower volatility compared to the broader market, potentially making it an attractive option for risk-averse investors, although leading in to earnings would not be one of those occasions.

From a technical analysis standpoint, DG is trading above both its 50-day ($102.04) and 200-day ($99.69) simple moving averages (SMAs). This positioning typically signals a positive trend, indicating sustained upward momentum in the stock price.

However, recent developments paint a mixed picture. In its Q4 FY24 earnings report released in back in March, Dollar General reported sales of $10.304 billion, exceeding expectations of $10.264 billion. Despite this, EPS came in at $0.87, missing the consensus estimate of $1.51. This discrepancy highlights existing pressures on profitability.

In response to these challenges, Dollar General announced plans to close 96 Dollar General stores and 45 pOpshelf stores. The company is also converting six pOpshelf stores into Dollar General locations, reflecting a strategic realignment of its retail footprint. The company's strategic initiatives, including inventory reduction and store modernization projects, known internally as Project Elevate and Project Renovate, aim to enhance the customer experience and improve operational efficiency.

Despite this positive momentum, some analysts remain cautious. Concerns linger regarding margin pressures stemming from competitors and rising operational costs. The consensus rating on the stock remains a “Hold,” with a modest projected upside to a price target of $112.92.

Adding to the complexity, Goldman Sachs downgraded Dollar General's rating from “Buy” to “Neutral” in September. This downgrade led to a 4.33% decline in the stock over two days, reflecting concerns about sustaining earnings growth amid a competitive retail environment, rising input costs, and limited e-commerce investments. The firm cited aggressive pricing strategies by rivals like Dollar Tree and Walmart as potential threats to Dollar General's margins.

Options trading activity also provides insights into investor sentiment. Put contracts at the $73.00 strike price have shown notable investor interest, suggesting that some traders are hedging against potential downside risks.

In an effort to attract budget-conscious consumers during the holiday season, Dollar General launched several holiday promotions in October. These initiatives included the “7 Days of Savings” event and weekly 3-Day Sales Events, offering significant discounts and buy-one-get-one-free deals.

The implied volatility (IV) for DG is currently at 44.67%, with a historical volatility of 29.70%. Based on these metrics, the expected move for DG's stock price over the next week is approximately $8.02, or 7.33% of the current stock price. This suggests a potential trading range between $101.87 and $117.91.

The market's reaction to the earnings report will likely hinge on whether Dollar General can demonstrate effective execution of its strategic initiatives amidst prevailing headwinds. Markets will be scrutinizing same-store sales growth, margin performance, and progress on cost-saving measures.