Deep discounter Dollar General (NYSE:DG) posted record fourth quarter and full year results. The company continued to show strong gains in both top and bottom line growth, as it carried forward momentum with bargain-conscious consumers it mined throughout the recession.

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A Hot Group On The Move
Along with its stellar earnings report, speculation has surfaced that Dollar General may be interested in buying its rival, Family Dollar Stores (NYSE:FDO). Family Dollar recently turned down an offer from Trian Group. The dollar store space has gotten hotter as the deep discounters made inroads into the customer base of traditional discounters throughout the recession. Dollar General and the other dollar retailers have an explicit strategic aim to retain these newfound customers as the economy moves into recovery. Many investors feel, however, that dollar store growth will continue to slow as the economy improves.

Recently, dollar retailer 99 Cents Only Stores (Nasdaq:NDN) engaged Leonard Green & Partners to attempt to take the company private. Close out retailer Big Lots (NYSE:BIG) is exploring its options with the possibility of a sale. Some observers consider Dollar Tree Stores (Nasdaq:DLTR) the most attractive buyout candidate of the dollar store group. The company is twice as profitable as 99 Cents stores and holds three times the amount of cash that Family Dollars does. Dollar Tree's attractive margin efficiency was cited as well.

From the M & A perspective, the sector is hot and in play. (For related reading, see M&A Competition Is Cutthroat For Acquirers.)

Dollar General's Results
Fourth quarter gross profit margin was 32.4%, up 23 basis points. Adjusted net income was $226 million, or adjusted diluted EPS of $0.65, compared to $173 million or adjusted diluted EPS of $0.51 in the previous year's quarter. Net sales for the quarter increased 9.4% to $3.49 billion, from $3.18 billion in the fourth quarter of 2009. Some inflationary pressures affected costs, which were offset by higher markups. Despite poor weather in the second half of the quarter, with customers coming into stores less frequently, customers bought more when they did shop.

For the full year, total sales reached $13.04 billion versus $11.8 billion in 2009, with same store sales up 4.9%. Adjusted net income was $649 million or adjusted diluted EPS of $1.88, compared to an adjusted net income of $425 million or adjusted diluted EPS of $1.31.

Growth Outlook
Dollar General's outlook for 2011 remains very positive. The company's forecast is for 2011 is for an 11-13% sales increase, with a 3-5% increase in same store sales. Earnings per share is expected to come in at $2.20 to $2.30. Dollar General CEO Rick Dreiling did say that the company's core customers are still dealing with difficult economic times. The ongoing rise in gasoline prices represents a continuing challenge also for Dollar General customers.

Again, observers cite the slowing growth in the dollar store sector, despite the strong fundamentals, so many investors are wary of the future prospects of the companies in the sector. So far, though, Dollar General and the dollar stores have prevailed against any headwinds. They look to eventually prove the doubters wrong. (To learn about retail stocks, see Analyzing Retail Stocks.)

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