Dollar General's Huge Expansion Keeps Paying Off

On Tuesday, Dollar General (DG -0.41%) will release its latest quarterly results. With competition heating up in the deep-discount retail niche, investors will be looking to see whether Dollar General's big expansion recently can sustain the company's growth.

Dollar General is just one of many retailers that have focused on the lowest end of the retail market. As surprising as it might seem, selling low-priced items can be profitable if a company can focus on keeping margins as high as possible. Let's take an early look at what's been happening with Dollar General over the past quarter and what we're likely to see in its quarterly report.

Stats on Dollar General

Source: Yahoo! Finance.

How will Dollar General's earnings fare this quarter?
Analysts have reined in their earnings estimates on Dollar General somewhat over the past few months, cutting their April-quarter consensus by $0.02 per share. The stock, though, hasn't slowed in its advance, rising nearly 20% since late February.

Investor optimism about Dollar General seems somewhat misplaced given the economic headwinds that are hitting the deep-discount retail niche. Although late tax-refund checks shouldn't really reflect themselves in quarterly numbers that include February through April, the impact of the increase in the Social Security payroll withholding tax has hit low- and middle-income workers especially hard, with the extra 2% reduction in their take-home pay reducing discretionary income substantially.

Yet dollar stores have found ways to thrive despite the tough economy. Dollar Tree (DLTR 0.04%) reported first-quarter earnings well in excess of estimates and raised its guidance for the remainder of the year, with same-store sales growth of 2.1% showing the success of broadening its inventory to include cigarettes and fresh food in order to draw more customers to buy its higher-margin items. Family Dollar (FDO.DL) posted similar results in April, with same-store sales growth of almost 3% on dramatically higher overall revenue. For its part, Dollar General even managed to weather a secondary stock offering in March led by selling shareholders without seeing too big of a dilutive hit to its share price.

Meanwhile, Dollar General's aggressive expansion plans continue apace. With plans to open more than 600 stores this year, Dollar General announced in late April that it wanted to hire 10,000 new employees this month.

In Dollar General's report, pay close attention to how same-store sales compare to overall revenue growth. If new stores start to hit the market saturation point, then you should see those figures start to converge. That would be a sign that the big growth that the company and its peers have seen could be nearing an end.

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