J.P. Morgan Chase has recently upgraded Dollar General (DG) to a buy rating, signaling a potentially favorable outlook for the discount retailer. Analyst Matthew Boss increased the price target from $128 to $166, suggesting a 25% upside from recent trading levels. In contrast, Roth Capital has downgraded Costco (COST) to a sell rating, highlighting ongoing challenges for the wholesale giant.
Boss pointed out several favorable trends for Dollar General in his analysis. A survey of Dollar General customers revealed that their primarily low-income demographic is projected to experience stable employment through 2026. This stability, coupled with persistent inflation, suggests a unique opportunity for Dollar General to cater to both low-income and middle-income shoppers. The latter group is increasingly looking for value, influenced by concerns over job security amidst rising automation. Interestingly, low-income customers feel relatively less threatened by such technological changes, according to the survey.
Moreover, there’s a noticeable shift among higher-income consumers toward value-driven purchasing, which is a boon for discount retailers like Dollar General. In fact, this group represented the fastest-growing consumer segment for the company in the last quarter. Boss anticipates an increase in same-store sales by 2.5%, alongside modest net store growth and a gross margin expansion of at least 30 basis points. Additionally, he forecasts earnings per share growth of 12-13% and an impressive annual free cash flow surpassing $1 billion.
Dollar General’s stock experienced a slight uptick, bringing it to its highest levels since July 2024, with a remarkable 76% rise year-to-date. Following a recent recovery, the stock appears to be forming a promising three-weeks-tight pattern.
On the other hand, Costco is facing headwinds. Analyst Bill Kirk from Roth Capital has downgraded the retailer, citing declining membership renewal rates and intensifying competition. Renewal rates have dipped, with a significant drop in paid member growth, which only increased by 400,000 last quarter, down from a previous rate of nearly 1 million. This stagnation coincides with an increase in competitors like Walmart’s Sam’s Club, which is ramping up expansion efforts and drawing attention away from Costco.
Kirk’s concerns extend to the overall valuation of Costco’s stock, which remains relatively high despite recent underperformance. The stock has declined over 3% and is hovering at its lowest point since August 2024, down 6% year-to-date and trailing behind key moving averages.
In conclusion, while Dollar General seems poised to capitalize on evolving consumer dynamics, Costco is navigating a more challenging landscape marked by declining growth metrics and rising competition. Investors may want to closely monitor these contrasting trajectories within the retail sector, as they reflect broader shifts in consumer behavior and market conditions.
