Dollar General Forges Ahead

By Greg Sushinsky | December 02, 2010 AAA

Dollar General (NYSE:DG) recently announced plans to hire 6,000 new workers to staff its planned opening of 625 new stores.This is in the face of the Street's perception lately that Dollar General and the other dollar stores have had their day.The Street's view is that Dollar General and the others will lose the middle income customers they've gained as the economy continues to grow stronger.

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Dollar General's Recent Earnings
Dollar General reported another impressive quarter in early December, with a more than 10% increase in net sales and a nearly 70% increase in net income.The market saw a decline in the sales growth rate, however, and sent the shares down more than 8%. More recently, the market did the same to Family Dollar (NYSE:FDO) after its reported record earnings.

The Market's Reaction
The market focused on Dollar General's same stores sales; they increased by 4.2% for the quarter, but this rate represents a reduction from the 5.1% number posted the previous quarter and 6.7% the quarter before that. Last year's same quarter saw same store sales increase by 9.2%. Dollar General's growth rate is clearly decelerating and many holders of the stock dumped shares as a result.

Slower Growth
The decelerating growth rate is interpreted on the Street as a trend that will continue. However, investors with a longer-term view might see the same news with different eyes. The company earned $133 million in its third quarter, or 37 cents per share, compared to $76 million, or 24 cents per share, in the same quarter last year. Revenue grew from $2.93 billion to $3.22 billion. Beating the comp of 9.2% from last year's quarter would have been awfully hard, yet 4.2% same store sales is still a notable achievement. So although growth is technically slowing, it's still impressive.

Other Retailers
The bar has been set high in the retail revival. Dollar Tree (Nasdaq:DLTR) reported an 8.7% increase in same store sales in its third quarter, compared to a 6.5% increase in the same quarter the previous year. November retail sales saw a resurgence in departments stores: Dillard's Dept. Stores (NYSE:DDS) bounced 8%, JC Penney (NYSE:JCP) was up 9.2%, and Macy's (NYSE:M) sales rose 6.1%.

The performance was strong across the board, as wholesaler Costco (Nasdaq:COST) was up 9% and off-price clothier Ross Stores (Nasdaq:ROST) saw sales increases of 6%. Luxury department store Saks (NYSE:SKS) posted a 5.3% gain too, although this missed expectations. This brings us back to Dollar General, where the Street's expectations were unrealistic in that they expected the store's torrid growth to continue. Most of the department stores have had one or perhaps a couple of good quarters, so they are beating dreadful comps.

Dollar General Fights On
CEO Richard Dreiling of Dollar General told an investor conference recently that the company will hold onto the trade-down customers, and maintained that upper income customers are committed to sticking with Dollar General. Also, one analyst noted that the Street may have it wrong and that trade-down customers won't abandon the dollar stores, even as the economy improves. Even if some are lost, this effect will be mitigated by lower-income customers, who will have more money to spend in an improved economy.

Dollar General Stock
Dollar General achieved record sales and earnings last quarter, so for long-term investors the focus should be different. The company is committed to capturing what it calls "sustainable growth opportunities," although that growth rate may be more muted than it has been. This doesn't mean that growth is over for Dollar General, but it may mean the stock price will fall to a more reasonable level. Value investors may want to start watching, while long-term holders shouldn't be shaken out of their shares. (For related reading, take a look at Analyzing Retail Stocks.)

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