Dollar General's Impressive Run Continues

Discount consumer goods retailer Dollar General (NYSE:DG) has posted solid and steady operating growth in recent quarters. Its third quarter was no exception and hasn't gone unnoticed by investors. Because of the strong share price rally, there is little investment appeal for prospective shareholders, though a down economy could keep operating growth strong.

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Third Quarter Recap
Total sales advanced at a healthy 11.5% clip, rising to $3.6 billion. Same-store sales advanced 6.3%, which the company pointed out was its third straight quarter of accelerating comps. New store growth accounted for the rest of the top line increase. So far this year, Dollar General has opened 482 new locations to bring its total store count to more than 9,800 in 38 states.

The consumables category, which includes food, shampoo and pet supplies, represented the largest product category at 75.3% of total sales, and saw the strongest sales growth at 13.8%. Seasonal and home product sales rose in the high single digits (12.1 and 6.6% of total sales, respectively), with apparel the only category to post negative trends. It saw sales fall 0.7% to represent the smallest percent of total sales at 6%. Overall, Dollar General focuses on selling "high quality national brands from leading manufacturers" that include The Procter & Gamble (NYSE:PG), Kimberly-Clark (NYSE:KMB), Kellogg (NYSE:K) and Kraft Foods (NYSE:KFT).

Gross profit growth mirrored the sales expansion at 11.5%, rising to $1.1 billion. Management was again able to keep a tight lid on SG&A expenses, which helped boost operating profit growth to 13.3% for profits of $310.9 million. Operating margins came in at 8.6% of sales and have risen steadily over the past few years. Back in 2008 they were as low as 2.7%. A decline in interest expense helped push net income up 33.6% to $171.1 million, or 50 cents per diluted share. (To know more about income statement, read: Understanding The Income Statement.)

Outlook
For the full year, Dollar General anticipates sales growth of 13% and diluted earnings per share between $2.29 and $2.32. This represented an increase from previous profit guidance. Analysts have modeled almost the same sales growth and total sales of nearly $15 billion. (To know more about EPS, read: How To Evaluate The Quality Of EPS.)

The Bottom Line
Dollar General's stock is bumping up against its all-time highs. Strong operating trends, improved sentiment towards discount retailers because of worries of a weak economy, and an investment from Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) have all helped boost the stock more than 30% so far in 2011. Only rival Dollar Tree (Nasdaq:DLTR) is doing better as it has logged close to a 50% year to date increase.

At the current share price, Dollar General is richly valued at a forward P/E of almost 18. The company should be capable of solid double digit profit growth over the long haul, but given the recent price rally, this growth is already priced into the stock. The same can be said for most other players in the discount retailing space.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.