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Dollar store chains got slammed last month as Dollar General (NYSE:DG)Dollar Tree (NASDAQ:DLTR), and Five Below (NASDAQ:FIVE) all posted disappointing earnings reports. As the chart below shows, all three stocks fell by 11% or more.

DG Chart

DG data by YCharts

The culprit appeared to be a resurgent Wal-Mart (NYSE:WMT), which has invested to clean-up stores, raise wages, bring back greeters, and eliminate out-of-stocks. In its most recent quarter, the retail giant posted comparable sales growth of 1.6%, its best performance in several years. Wal-Mart has also lowered prices on key traffic drivers such as fresh produce, and branded and private-label goods, helping to poach customers from dollar store chains.

Dollar store stocks had thrived in recent years, finding a retail niche with low-income customers that had been ignored by other companies as well as one that was not affected by or the rise of e-commerce.

However, that trend may be changing as the three companies above cited similar competitive threats. At Dollar General, same-store sales increased just 0.7% in its most recent quarter as management noted the effects of food deflation and a decline in food stamp participation rates and benefit levels. CEO Todd Vasos said, "the competitive environment intensified in select regions of the country."

At Dollar Tree, meanwhile, comparable sales growth slowed to 1.2% as management also noted a "challenging retail sales environment." Dollar Tree also lowered its full-year revenue guidance and said it expected full-year comparable sales to be in the low-single digits.

Five Below, on the other hand, fared better than its competitors with a comparable sales increase of 3.1%. Five Below tends to sell fewer staples than Dollar General and Dollar Tree, making it less of a direct competitor with Wal-Mart. Five Below's CEO also sounded more optimistic than his rivals, but, nonetheless, the company was affected by the weak reports from its peers, falling 11% in the quarter.

Earnings growth remains strong

Despite falling stock prices and weakened sales, earnings growth was solid at the dollar stores in the last quarter.

At Dollar General, which had the sharpest drop last month, earnings per share still increased 14% to $1.08 due to a 6% increase in revenue, a modest reduction in expenses, and a share buyback program that reduced shares outstanding by more than 4% in the last year. With a profit margin near 6%, Dollar General remains one of the most efficient retailers on the market.

Dollar Tree, meanwhile, has successfully integrated its Family Dollar acquisition, and saw gross margin improve 190 basis points to 30.3%, and Selling, General, and Administrative expenses fall 120 basis points to 23.1%. As a result, operating margin jumped from 4.1% to 7.1%. Strong earnings growth caused Dollar Tree to actually raised its full-year EPS guidance to $3.67-$3.82, despite lowering its revenue guidance.

Finally, Five Below saw operating income jump 36% on a 20.8% increase in sales, and raised its full-year EPS guidance to $1.28-$1.32 even though it sees comparable sales growth slowing in the current quarter.

On the other hand, despite worrying dollar store investors, Wal-Mart is actually seeing profits fall as it steps up investments in stores, and adjusts its business model to the e-commerce era.

The lesson seems to be that the recent dip in dollar store stocks was more a result of bloated valuations rather than weak performance, as even with modest comparable sales growth, profits are still growing at a solid pace.

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