On Friday, BofA Securities adjusted its outlook on Dollar General (NYSE: NYSE:DG), increasing the stock price target to $118 from the previous $100 while maintaining an Underperform rating on the stock. The firm noted that Dollar General's operating margin continues to be under pressure due to issues with product mix and inventory shrinkage.
According to the firm, Dollar General is expected to face headwinds throughout 2024 as consumers prioritize consumable goods. Still, some improvement in shrink levels is anticipated in the second half of the year and into 2025, thanks to the company's "Back to Basics" initiatives.
These initiatives include increasing employee presence at the front of stores, planning to reduce or eliminate self-checkout in several locations, and beginning to rationalize 1,000 stock keeping units (SKUs).
The firm also pointed out that while Dollar General is taking actions to address these challenges, there are still risks associated with retail labor and other store-level costs. Despite these concerns, BofA Securities expects underlying margin drivers such as the DG Media Network, private label expansion, and inventory optimization to support the company's profitability.
Dollar General's efforts to improve its operational efficiency are part of a broader strategy to mitigate the impact of the challenges it faces. The company's decision to increase employee presence and adjust its self-checkout options are among the measures being taken to enhance the customer experience and reduce losses from shrinkage.
The price target adjustment reflects BofA Securities' assessment of the current challenges and the steps Dollar General is taking to address them. While the Underperform rating suggests that the firm sees potential difficulties ahead for Dollar General, the increased price target indicates an expectation of some progress in the company's operational performance.
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