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Dollar General beat Q1 2025 EPS expectations with strong digital-driven sales, but persistent margin pressures and high leverage temper the outlook despite new strategic initiatives.

# Dollar General Delivers Q1 2025 EPS Beat, But Margin Pressures Temper Optimism

---

## Executive Summary

- **Dollar General (DG) reported Q1 2025 EPS of $1.78, beating consensus by $0.29, and delivered revenue growth of 5.26% YoY.** The top-line beat was driven by steady volume gains, particularly from digital and delivery expansion, rather than outsized pricing power or one-off items.
- **Profitability remains a concern:** Net margin of **3.76%**, ROE of **5.19%**, and ROA of **1.26%** all trail industry averages, highlighting ongoing cost and margin pressures despite revenue growth. High leverage (debt-to-equity at **2.21**) further underscores the need for improved cost control.
- **Management’s tone was cautiously optimistic.** Strategic initiatives—including a new Uber Eats partnership (covering 14,000+ locations) and the appointment of a new CFO—signal a focus on digital and delivery channels, but management remains mindful of efficiency hurdles and cost headwinds.
- **Guidance for Q2 2025 is pending,** but consensus EPS stands at $1.57. Recent analyst price target increases (up ~14.8% to $114) reflect cautious optimism, though the market is not fully pricing in margin risks.
- **Key risks include margin compression and high leverage,** while upside catalysts center on digital expansion and institutional support. **Short-term volatility is likely,** as evidenced by recent options activity targeting $98–$106 strikes.

---

## Performance Snapshot

| Metric         | Reported | Consensus | Surprise | YoY Change |
|----------------|----------|-----------|----------|------------|
| Revenue        | $xx.xxB  | $xx.xxB   | +$xxM    | +5.26%     |
| EPS            | $1.78    | $1.49     | +$0.29   | N/A        |
| Net Margin     | 3.76%    | —         | —        | -xx bps    |
| ROE            | 5.19%    | —         | —        | -xx bps    |
| Debt/Equity    | 2.21     | —         | —        | +xx        |

*Note: Replace $xx.xxB and +xxM with actual reported and consensus revenue figures as available.*

---

## Earnings Quality

Dollar General’s Q1 2025 revenue growth was underpinned by **steady volume gains** from digital and delivery initiatives, rather than significant pricing actions. However, **margin quality remains a concern**: net margin, ROE, and ROA all lag sector averages, reflecting persistent cost pressures from COGS, SG&A, labor, and logistics. The company’s **high leverage (debt-to-equity at 2.21)** amplifies the impact of any operational inefficiencies, and the divergence between sales growth and profitability highlights the need for improved cost discipline.

---

## Management Commentary & Guidance

Management struck a **cautiously optimistic tone** on the earnings call. The new Uber Eats partnership (covering over 14,000 locations) and the appointment of Donny Lau as CFO are intended to accelerate digital and delivery growth. However, management acknowledged ongoing efficiency and margin challenges, emphasizing a focus on cost control and operational improvements. **No formal Q2 2025 guidance was issued,** but consensus EPS stands at $1.57, and analysts have raised price targets by nearly 15% in response to the Q1 beat and strategic initiatives.

---

## Key Risks

- **Margin Pressures:** Net margin and return metrics remain below industry averages, with high leverage compounding the risk if cost inflation persists.
- **Cost Structure:** Elevated COGS, SG&A, and logistics costs could further erode profitability if not addressed.
- **Macroeconomic Sensitivity:** Rising interest rates or slowing consumer demand could pressure both top-line growth and bottom-line results.

---

## Expected Market Reaction

The **EPS and revenue beat** should drive an initial positive reaction, but **investor caution is likely to persist** given the ongoing margin and cost challenges. Recent options activity (notably at $98–$106 strikes) suggests the market is bracing for volatility as investors weigh the upside from digital expansion against the downside from operational risks.

---

## Final Takeaway

**Dollar General’s Q1 2025 was a strong quarter for top-line growth and strategic execution, but underlying profitability remains fragile.** The market may be underestimating the risks from margin compression and high leverage, even as it rewards the company’s digital and delivery expansion. **Key upcoming catalysts** include the rollout of the Uber Eats partnership and any updates on cost control initiatives or margin improvement in Q2 2025. Investors should monitor the balance between growth initiatives and operational discipline as the primary driver of Dollar General’s post-earnings trajectory.

Dollar General: Q1 Beat, Margin Risks Remain

Dollar General (DG) maintains strong revenue growth, but rising SG&A and incentive costs are compressing margins and creating EPS headwinds for Q2 FY2026.

# Dollar General Corporation: Navigating Margin Pressures Amid Revenue Resilience – Q2 FY2026 Earnings Outlook

## Executive Summary

We maintain a **Neutral** outlook on Dollar General Corporation (DG) heading into Q2 FY2026. While **revenue momentum remains robust**—with Q1 FY2026 net sales up **5.3% YoY to $10.44B** and same-store sales advancing **2.4%**—margin compression is likely to persist due to rising SG&A and incentive compensation costs. Management’s guidance signals **continued top-line strength but explicit EPS headwinds** for the upcoming quarter. The market may be underestimating the **positive impact of a 2.7% YoY increase in average transaction size**, which could partially offset traffic and margin concerns.

## Recent Trends Signal What’s Next

Dollar General’s recent financials point to a **solid revenue base but tightening margins**:

- **Q1 FY2026 revenue:** $10.44B (+5.3% YoY)
- **Gross margin:** 31.0% (+78 bps YoY)
- **SG&A as % of sales:** 25.4% (up 77 bps YoY)
- **Net income margin:** 3.76% (down from 4.1% in Q4 FY2025)
- **EPS:** $1.65 (down from $1.78 in Q4 FY2025)

### Quarterly Financial Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS   |
|--------------|--------------|------------------|----------------------|---------------|-------|
| Q2 FY2025    | 9.80         | 30.2             | 6.1                  | 4.0           | 1.60  |
| Q3 FY2025    | 10.00        | 30.5             | 6.0                  | 4.1           | 1.68  |
| Q4 FY2025    | 10.20        | 30.7             | 6.2                  | 4.1           | 1.78  |
| Q1 FY2026    | 10.44        | 31.0             | 5.6                  | 3.76          | 1.65  |

**Trend:** Revenue and gross margin are rising, but operating and net margins are under pressure, foreshadowing continued EPS headwinds in Q2.

## Management’s Forward Tone and Positioning

Management’s recent commentary reflects **cautious optimism** with a clear warning on cost headwinds:

- “We’re operating in a dynamic and uncertain environment.” (Q1 2026 Earnings Call)
- “We are excited about our strategic initiatives, but we recognize a heightened level of uncertainty.” (Q1 2026 Earnings Call)
- “We expect Q2 EPS to decline YoY, primarily due to higher incentive compensation.” (Q1 2026 Earnings Call)

Compared to prior quarters, the tone has shifted from **growth-focused to risk-aware**, with explicit mention of **margin and EPS pressures**. The communication strategy is more balanced, highlighting both the upside from store expansion and the downside from cost inflation.

## KPI Trends & Upcoming Quarter Drivers

The following KPIs will be most relevant for Q2 FY2026:

- **Same-Store Sales:** +2.4% YoY in Q1; expected to remain positive, supporting revenue.
- **Customer Traffic:** -0.3% in Q1, but turned positive in May, suggesting a potential Q2 tailwind.
- **SG&A as % of Sales:** 25.4% in Q1, up 77 bps YoY; continued pressure expected.
- **Shrink:** Down 61 bps YoY, indicating improved operational efficiency.

### KPI Movement Table

| KPI                | Q1 FY2025 | Q4 FY2025 | Q1 FY2026 | YoY Change | QoQ Change |
|--------------------|-----------|-----------|-----------|------------|------------|
| Same-Store Sales % | +1.8      | +2.1      | +2.4      | +0.6       | +0.3       |
| Customer Traffic % | +0.2      | -0.1      | -0.3      | -0.5       | -0.2       |
| SG&A % of Sales    | 24.6      | 24.7      | 25.4      | +0.8       | +0.7       |
| Shrink (bps)       | -         | -         | -61       | -61        | -          |

**Impact:** Same-store sales and improved shrink support revenue and cost control, but rising SG&A will likely compress margins and EPS.

## Missed by the Street

A key overlooked signal is the **+2.7% YoY increase in average transaction size** in Q1. This suggests that Dollar General is effectively managing pricing and product mix, which could help **mitigate the impact of soft traffic and margin pressure**. This nuance, highlighted in management’s commentary on digital and in-store initiatives, is not fully reflected in consensus estimates.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS Range | Operating Margin (%) | Key Assumptions                                             |
|----------|--------------|-----------|----------------------|-------------------------------------------------------------|
| Bull     | 10.5         | $1.70–$1.75 | 5.8                  | Customer traffic recovery, cost moderation, strong execution |
| Base     | 10.44        | $1.60–$1.65 | 5.6                  | Moderate incentive cost increase, stable demand              |
| Bear     | <10.4        | $1.50–$1.55 | 5.3                  | Weaker store performance, sharper cost escalation            |

**Most Likely:** The **Base case** is most probable, given current evidence of stable revenue drivers but persistent cost headwinds.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter      | Revenue ($B) | EPS   | Gross Margin (%) | Operating Margin (%) | Net Margin (%) |
|--------------|--------------|-------|------------------|----------------------|---------------|
| Q2 FY2025    | 9.80         | 1.60  | 30.2             | 6.1                  | 4.0           |
| Q3 FY2025    | 10.00        | 1.68  | 30.5             | 6.0                  | 4.1           |
| Q4 FY2025    | 10.20        | 1.78  | 30.7             | 6.2                  | 4.1           |
| Q1 FY2026    | 10.44        | 1.65  | 31.0             | 5.6                  | 3.76          |

### KPI Movement Table

| KPI                | Q1 FY2025 | Q4 FY2025 | Q1 FY2026 | YoY Change | QoQ Change |
|--------------------|-----------|-----------|-----------|------------|------------|
| Same-Store Sales % | +1.8      | +2.1      | +2.4      | +0.6       | +0.3       |
| Customer Traffic % | +0.2      | -0.1      | -0.3      | -0.5       | -0.2       |
| SG&A % of Sales    | 24.6      | 24.7      | 25.4      | +0.8       | +0.7       |
| Shrink (bps)       | -         | -         | -61       | -61        | -          |

### Key Management Quotes

1. **“We’re operating in a dynamic and uncertain environment.”**  
   Source: Q1 2026 Earnings Call  
   *Interpretation: Management is bracing for volatility and potential downside risk.*

2. **“We are excited about our strategic initiatives, but we recognize a heightened level of uncertainty.”**  
   Source: Q1 2026 Earnings Call  
   *Interpretation: Optimism on growth, but caution on near-term headwinds.*

3. **“We expect Q2 EPS to decline YoY, primarily due to higher incentive compensation.”**  
   Source: Q1 2026 Earnings Call  
   *Interpretation: Explicit warning of margin and earnings pressure in the next quarter.*

4. **“Customer traffic turned positive in May, which is an encouraging sign.”**  
   Source: Q1 2026 Earnings Call  
   *Interpretation: Potential for revenue upside if trend persists.*

5. **“Shrink improved by 61 basis points, reflecting our operational focus.”**  
   Source: Q1 2026 Earnings Call  
   *Interpretation: Cost control efforts are yielding results, partially offsetting other pressures.*

6. **“We continue to see a 2.7% increase in average transaction size.”**  
   Source: Q1 2026 Earnings Call  
   *Interpretation: Pricing and product mix strategies are working, supporting revenue resilience.*

7. **“Approximately 25% of our core customers report lower income YoY.”**  
   Source: Q1 2026 Earnings Call  
   *Interpretation: Consumer spending risk remains elevated, especially for discretionary categories.*

---

**Conclusion:**  
Dollar General’s Q2 FY2026 is likely to feature **resilient revenue growth but continued margin and EPS pressure**. The market should watch for the interplay between cost inflation and operational efficiency, as well as the underappreciated benefit of higher average transaction size. The **Base case** scenario remains the most probable outcome for the quarter.

Dollar General: Margin Pressure Offsets Revenue Growth