Third-Quarter Cost Pressures at Dollar General Do Not Alter Our Long-Term Outlook; Shares Rich

Our $227 per share valuation of narrow-moat Dollar General should fall by a high-single-digit percentage, near the trading price’s reaction, after it announced third-quarter earnings affected by greater-than-anticipated cost pressures. We see the drivers of the margin underperformance (elevated supply chain costs, a mix shift to consumable goods, product cost inflation, and shrink) as transitory, so our long-term forecast is intact (mid-single-digit percentage yearly top-line growth, high-single-digit operating margins, on average). We suggest investors seek a more attractive entry point as the trading price does not afford a margin of safety.