Dollar General Corp. (NYSE:DG) posted a strong quarter in a still weak economy, with the company delivering a more than 50% increase in net income. Revenue also increased by more than 10%, while same-store sales rose 5.1%. The company provided outlook for continued robust sales, but Wall Street sees cautions as the company will be pressured in this economic environment.
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Sales and Income Surge
Sales rose from $2.90 billion the second quarter last year to $3.21 billion this year's quarter, a 10.8% increase. Net income was $141.2 million, or a diluted earnings per share of 41 cents. Excluding a one-time debt repayment loss, earnings were $145 million or 42 cents per share. Last year's same quarter saw earnings of $93.6 million, or 29 cents per share. Chairman and chief executive Rick Dreiling pointed out the company's strong execution was achieved in what he described as a "volatile" quarter, and that "same store sales accelerated during the last month."
The Dollar Discounters
This recession has been the dollar stores' time to shine. Dollar General shows accelerating earnings with an EPS of 35 cents in fiscal 2009, $1.05 in fiscal 2010, and already 81 cents EPS in fiscal 2011 versus 55 cents EPS through the same period, the first half of last fiscal year. Revenues are rising significantly as well. Rival Family Dollar Stores (NYSE:FDO) has shown even greater earnings and revenue strength. 99 Cents Only Stores (NYSE:NDN) has also grown its business in this extreme-value environment. The dollar stores have thrived while mid-level retailers such as Sears Holdings (Nasdaq:SHLD) have faltered. Sears even finds itself in competition with the dollar stores such as Dollar Tree (Nasdaq:DLTR), which reported healthier earnings than Sears recently.
Searching for Negatives
With Dollar General and the other dollar discounters hitting the ball out of the park the last few quarters, what's not to like? Critics point out that the same store sales momentum is slowing down, that the 5.1% increase came up short of some analyst expectations, and that sales slowed from the previous quarter's 6.7% same store sales rise. Also, with the weak employment situation, the vulnerability of Dollar General's low-income customer base is a concern. There is the abiding implicit belief that Dollar General and its competitors' business will slow markedly in an improved economy.
Dollar General on the Horizon
Dollar General, which is majority owned by private equity firm Kohlberg Kravis Roberts & Co.(NYSE:KKR), has plans to continue its aggressive expansion plans. It will open 600 new stores and remodel another 500 in 2010. Not only has its business not yet proved to be vulnerable during the recession, but it has steadily grown. Also, the concern of declining comparable sales may be offset by the rising trend in July sales mentioned by the company. The critics ignore as a potential lasting shift the achievement of greater customer traffic by Dollar General and the other dollar stores. Our thesis has been that these additional customers may prove to be more permanent.
Dollar Days Not Over
Dollar General should continue to do well as the economy limps along. We expect it to do well also when the economy strengthens. The stock is trading near its 52-week high right now, but this is a stock to monitor and consider for purchase on a share price drop. (For more stock analysis, check out Family Dollar Stores Still Thriving.)
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