MKM Maintains Buy On Dollar General Despite Disappointing Q2

MKM Partners maintained its Buy rating on Dollar General Corp. (NYSE: DG), despite "disappointing" second quarter results, as it believes the company's long-term trends still support a bullish view.

"While we are tempering our 2H16 outlook, we believe the LT growth story -- 6%-8% footage, 2%-4% comps, 10%-15% EPS growth -- remains intact," analyst Patrick McKeever wrote in a note.

Dollar General's same-store sales were positive and better than most retailers, but was lower than the first quarter and missed expectations as food price deflation and cuts in food stamp assistance had a bigger impact than anticipated. EPS grew 14 percent to $1.08, just shy of MKM's $1.09 estimate.

The company confirmed its 10-15 percent EPS growth guidance for FY16. But, MKM's view was above the implied range (of $4.36-$4.55) and it now takes a more conservative approach. For the third quarter, the brokerage now expects 1 percent comps versus a prior 3 percent and ex-items EPS of $0.98, down from earlier estimate of $1.01.

The analyst also slashed his fourth quarter outlook -- comps to 1 percent from 3 percent, and EPS to $1.46 from $1.49. For FY16, the analyst now sees 1.2 percent comps and EPS of $4.55 (down from $4.62).

McKeever also trimmed his price target by $11 to $86.

"While we don't have all the answers to the 2Q16 slip, LT trends are still in DG's favor -- no negative comps since the 2009 IPO, continued share gains in both units and dollars, rising sales per square foot -- and we don't think there has been a significant shift in consumer preferences away from the dollar stores," McKeever highlighted.

"While it may take more than a quarter or two, the softer trend is likely to prove temporary, in our opinion," McKeever added.