Dollar General Blew Up Its Defensive Reputation. Analysts Prefer This Stock.

The lack of appetite for buying the dip underlines how Dollar General’s guidance hit the case for the discount retailer acting as a recession-proof stock. It comes after peer

Dollar Tree

(DLTR) also lowered its outlook, with lower-income consumers facing pressure on their budgets.  

“We lower our estimates and continue to see risks among the dollar stores, where the consumer is under pressure and competition is intensifying,” analysts at KeyBanc Capital Markets, led by Bradley Thomas, wrote in a research note on Friday. KeyBanc has a Sector Weight rating on Dollar General stock. 

Some analysts argued Dollar General’s problems appeared to be partly of its own making. BMO Capital Markets analysts, led by Kelly Bania, noted Dollar General’s customer traffic fell during the period, compared with rises at Dollar Tree, Family Dollar and

Walmart
.
 They pointed to Dollar General’s elevated inventory levels as a risk and kept a Market Perform rating on its stock.

However, investors and analysts did see hope elsewhere in the discount retail sector.

Five Below

(FIVE) stock rose 5.4% in early trading on Friday, after the specialty discount retailer aimed at younger consumers raised the low end of its full-year revenue and profit forecasts.

Five Below

CEO Joel Anderson told analysts on an earnings call that he expected the company’s focus on younger consumers to shelter it from a spending downturn as “the last place customers cut out are their kids”.

Analysts seemed to agree with that take.

“We believe FIVE’s growth prospects and value proposition should be viewed favorably, particularly as consumers continue to seek value. With conservative store growth targets and the Five Beyond expansion catalyst, we see a compelling long-term growth story,” analysts at

Jefferies

wrote in a research note.

Jefferies has a Buy rating and $222 target price on Five Below stock, compared with its Friday trading price of around $178.

“Five Below is a strong defensive growth name benefiting from its leading value proposition, strong balance sheet, and capacity to successfully navigate prior periods of softening demand,” analysts at William Blair wrote. He kept an Outperform rating on the stock.

Write to Adam Clark at [email protected]