What happened

Dollar General (DG -1.15%), a nationwide chain of discount stores, has seen its shares climb 22.3% so far this week, according to data from S&P Global Market Intelligence. The stock closed at $187.60 last Friday, but by Wednesday had risen to $229.45. 

A shopper looks for low-priced items in a store.

Image source: Getty Images.

So what

The company released its first-quarter results before the markets opened on Thursday, and two things jumped out that excited investors. First-quarter revenue was a reported $8.8 billion, up 4% year over year, and the company issued bullish guidance for the rest of the year.

Dollar General said that despite inflationary pressures and some supply issues, it was upgrading its guidance for revenue growth between 10% and 10.5% for the year and earnings-per-share (EPS) growth of 12% to 14%. It also said it expected to spend $2.75 billion on share repurchases. In the company's first-quarter earnings call, chief financial officer John Garratt said the company expects comparable-store sales and EPS growth to be better in the second half of the year as the first-half comparisons will be adversely affected by sales last year that were boosted by stimulus money.

The guidance was a mild surprise because not everything was rosy in the first-quarter report. The company said that same-store sales were down 0.1% over the same period last year and net income and EPS were down year over year. Net income was listed at $552.7 million, down 18.5% from a year ago, and EPS was $2.41, down 14.5%. Still, even the bad numbers were better than analysts predicted.

Dollar General and other discount stores in the retail sector have done well during downturns. With the markets falling and inflation rising, people -- particularly those with lower incomes -- often look for ways to cut expenses, and that fits into Dollar General's business model.

That point was driven home when competitor Dollar Tree released its earnings on Thursday and had even better numbers. Dollar Tree said it saw sales grow 6.5% year over year to $6.9 billion and EPS of $2.37, up 48%.

Now what

The key for Dollar General will be if it is able to pass along inflationary effects by raising prices. Traditionally, many items have been $1 in the store, but that has changed, and if that doesn't turn customers away, the company can boost profit margins. Investors will want to see another strong quarter as the last quarter was really the first to show the effects of inflation.