Will Dollar General Earnings Stay Ahead of Dollar Tree and Family Dollar?

Dollar General (DG -0.29%) will release its quarterly report on Thursday and, throughout 2013, investors have been impressed with the dollar store's ability to keep its stock moving higher in the deep-discount space. Yet between competition from rivals Dollar Tree (DLTR 0.51%) and Family Dollar (FDO.DL) as well as the increasing challenge of avoiding cannibalization from its own store-count expansion, shareholders wonder how much further Dollar General earnings and revenue can grow before the dollar-store phenomenon runs its course.

Dollar General's long-term success has stemmed from the willingness of customers to go beyond big-box retail stores in search of even better bargains. The smaller stores that Dollar General has focused on creating have made it easier for the retail chain to expand, even as Family Dollar and Dollar Tree have also taken advantage of favorable conditions to try to boost their own store counts. Yet is there still demand for an ever-increasing number of Dollar General locations, or will the company reach its saturation point soon? 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 report.

Stats on Dollar General

Source: Yahoo! Finance.

What's next for Dollar General earnings this quarter?
In recent months, analysts have reined in their expectations about Dollar General earnings slightly, cutting $0.01 per share from their October-quarter estimates, and twice that for next year's projections. The stock hasn't suffered, though, climbing almost 5% since late August.

On the fundamental front, Dollar General extended its solid run of outperformance in early September, with July-quarter earnings that satisfied shareholders about its growth potential. Same-store sales rose 5.1%, outpacing Dollar Tree and Family Dollar by 1 to 2 percentage points and helping to boost Dollar General's earnings per share by about 20%. Even though Dollar General didn't raise its full-year guidance, many investors increasingly believe that the company errs on the side of being too conservative in its projections.

Overall, conditions in the deep-discount industry appear to be favorable. Dollar Tree reported its third-quarter results last month, with solid sales gains helping to push adjusted earnings per share up by double-digit percentages. With those gains coming throughout Dollar Tree's footprint, it's reasonable to assume that Dollar General should see similar success from its growing network of stores. Yet, both Dollar Tree and Family Dollar have commented on hesitancy among consumers to spend aggressively -- a factor that both drives some higher-end shoppers into deep-discounters' doors, and weighs on how much shoppers spend once they're there.

Dollar General has tried to stand out from its competitors by emphasizing consumable items such as tobacco. Margins on these goods tend to be weaker than on many of the other items that dollar stores sell, which is one reason why they haven't been as quick to embrace the trend as you might expect. Dollar General has pointed out, however, that two-thirds of its customers who buy tobacco also buy other items, suggesting that stocking consumables can be a net positive for the company. By contrast, Dollar Tree has avoided low-margin tobacco, although it is offering frozen and refrigerated food products.

In general, though, economic conditions for Dollar General and its peers are almost ideal. Even as the economy has recovered somewhat, underemployment and stagnant wage growth has forced millions of Americans to be more cost-conscious in their budgeting. That has driven more traffic to dollar stores and, with the ongoing trend toward more part-time hiring, Dollar General is in prime position to offer those customers what they need.

In the Dollar General earnings report, watch to see if the company can, once again, stay ahead of Family Dollar's most recent growth pace. As long as its expansion plans keep bearing fruit, Dollar General has plenty of room to see its stock rise from here.

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