Rising Food and Gas Prices Boost Dollar General's (DG) Earnings

Over the past twelve months, shares of Dollar General (DG: Charts, News) have risen more than 50%, impressively defying macro economic worries. On Thursday, the discount goods store impressed analysts and investors again, beating fourth quarter expectations with strong profit and sales.

The company's earned an adjusted 87 cents per share, or $292.5 million, on revenue of $4.19 billion. This was a 33% improvement in profit and 20% gain in sales from the prior year's fourth quarter. Analysts on average anticipated earnings of 82 cents per share on revenue of $4.11 billion.

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Dollar General attributed its robust earnings to strong holiday-quarter earnings, higher sales volume and more money spent by customers per visit. Dollar General has directly benefited from inflation, which has notably cut into Americans' spending power. As a result, the scrappy underdog Dollar General has emerged as a viable competitor to superstores Wal-Mart (WMT: Charts, News) and Target (TGT: Charts, News).

Dollar General's same-store sales rose 6.5%, topping its own forecast for 5% growth in the fourth quarter. By comparison, its closest competitor Family Dollar (FDO: Charts, News) posted a 4.1% gain. Most of Dollar General's merchandise is priced under $10, which remains an attractive choice in uncertain times when household budgets are limited by unemployment, gas prices and food prices. Non-perishable food items have sold better than other discretionary items.

Looking forward, the company plans to add 625 stores to its 10,000 U.S. locations, matching the same amount of new stores opened in 2011. 80 of the new stores are set to open in new markets - such as California, Connecticut, Nevada, Massachusetts and New Hampshire. The company also plans to remodel or relocate up to 550 stores. Family Dollar's stores notably increased an average of 7% in square footage in 2011, and are expected to grow an additional 7% in 2012.

These expansions, which also include two new distribution centers, are expected to slightly crimp its profit in the first half of the year, due to higher expenses. The company is expected to spend between $600 million and $650 million on capital expenditures. 65% of these expenses will be allocated to re-models, re-locations and purchasing new stores. 20% will be set aside for maintenance, while 15% will be spent on transportation, distribution and special projects.

For 2011, Dollar General's sales, general and administrative expenses decreased from 22.3% the previous year to 21.7%.

Despite a tighter start to the year, the company expects same-store sales to rise between 3% to 5%, while total sales are expected to rise between 8% to 9%. Full-year earnings per share are forecast between $2.65 to $2.75, up from the $2.22 it earned for fiscal 2011. Analysts are expecting the company to earn $2.71 per share for 2012.

CEO Richard Dreiling hinted at modest economic improvement in the coming year, but remained cautious regarding discretionary spending. "While we are seeing some indications of positive trends in the economy," he said, "we believe our customers' discretionary spending will continue to be constrained in 2012." Dreiling also stated that higher gas prices could help the company's sales. "When gas prices get higher, more customers need us."

Dollar General repurchased 4.9 million shares during the fourth quarter, as part of its current $500 million share buyback plan. The company still has $315 million remaining to repurchase shares in the future.

Despite the run up over the past year, shares of Dollar General remain reasonably valued at 17 times forward earnings with a 5-year PEG ratio of 1.07. Shares have held steady even as the European debt crisis weighed on most of the market, making it a conservative growth investment in uncertain times.

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Published on Mar 23, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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