Dollar General's Real Strategy for Bringing in the Money

Deep-discount retailers seem to have had a great run since the recession, as consumers have been on the hunt for bottom-of-the-barrel deals. Not only did they perform really well during the crisis, but the trend appears to be continuing as the economy recovers slowly but steadily.

And there's no better example than retailer Dollar General (NYSE: DG  ) , which recently witnessed a 36% rise in first-quarter profits, helped by increasing sales of seasonal products and consumables. Buoyed by its strong quarterly performance, Dollar General raised its annual guidance by $0.03 to range from $2.68 to $2.78.

Growing top line
Dollar General's products are normally priced below $10 -- which perhaps explains why the company performs well even under adverse market conditions. A rise in customer traffic as well as average sales per trip (for the 17th consecutive quarter) led Dollar General's revenues to rise 13% over the year-ago period. This also helped the company's same-store sales rise by 6.7%.

In fact, Dollar General's same-store sales were better than most rivals'. For instance, in its most recent quarter, Wal-Mart's (NYSE: WMT  ) U.S. same-store sales rose by 2.6% whereas those of fellow dollar store Family Dollar (NYSE: FDO  ) went up by 5.6%.

Although the company's cost of goods sold rose by 13% during this quarter, its gross margin remained unchanged from the year-ago period at 31.5%. This shows that the company has managed to keep a lid on rising costs following improved sales.

Increasing store base
Overall sales growth was also helped by the fact that the company opened 128 stores during this quarter, which included eight Dollar General Market stores as well as seven DG plus stores -- which represent 10,000 square feet of selling area. This has helped increase the average ticket. And that's not all, as the retailer plans to open another 625 stores this year, out of which 80 will be in brand-new markets such as California and Nevada, according to Citi Investment Research & Analysis.

The new, more convenient DG plus stores should help continue to attract customers and raise the average ticket in the long run. I think Dollar General will look to build on this concept more going ahead. With consumers' purchasing power being largely constrained in a sluggish economy, Dollar General can reasonably expect more trade-down from a penny-pinched middle class.

Dollar General fired on all fronts during this quarter and also gave a bullish outlook for the rest of the year. Follow the Tennessee-based retailer to see how it really does for the rest of the year with the help of our free Watchlist service by simply clicking here.

Looking for a broader perspective on retail stocks? Note this: There is a major shift in the retail space that no company will be able to sidestep. Find out more in our report "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail."

Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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