Dollar General (NYSE:DG) reported mildly disappointing results for its second quarter this morning. The company met analysts' earnings expectations, but comparable-store sales and revenue came in below consensus estimates as consumer confidence dipped in the latter half of the quarter. However, management expects the second half of the year to be much better, while the company also continues its pursuit of Family Dollar (UNKNOWN:FDO.DL). If management is right, Dollar General is set up for an exciting back half of 2014.

Falling short of expectations

Some analyst expectations for the quarter proved too optimistic, but management is adamant that the company will hit full-year targets.The company met a quarterly $0.83 EPS estimate, growing the metric 10.7% from the 2013 second quarter. Dollar General's revenue increased 7.5% to $4.72 billion, while analysts expected $4.77 billion. The revenue disappointment is largely due to slower comparable-store sales growth, which came in at 2.1% instead of the expected 2.8%.

Despite the relatively soft top-line numbers for the quarter, management believes the company is still on track for $3.45 to $3.55 EPS and 3% to 3.5% comparable-store sales growth for the full fiscal year. Through the first 26 weeks of fiscal 2014, Dollar General's same-store sales increased 1.8%, and it delivered $1.54 EPS. Both measures will need to pick up considerably in the back half of the year if the company is to hit its targets.

Breaking it down

Dollar General is one of many retailers that had a relatively strong May and then experienced a weak June and July. According to CEO Rick Dreiling in the company press release:

Our second-quarter same-store sales began very strong with a year-over-year increase in May of more than 3.5 percent; however, this growth moderated as we moved through June and July given the competitive environment and a consumer who, although resilient in the face of economic uncertainty, remains cautious with her spending.


By management's account, things are already picking up as Dollar General's fiscal third quarter gets into full swing. The third quarter is almost one-third done. Dreiling notes that the company is already seeing "sales momentum pick back up and expect[s] that momentum to build as our initiatives gain traction with our customers." If this trend continues, the company could well hit its full-year targets.

But even if Dollar General's sales pick back up, product mix and pricing may determine whether it hits the higher end or lower end of its target EPS range. In the second quarter, lower-margin consumables like tobacco, perishables, and candy grew faster than non-consumables. Dollar General also ran promotions on many of these products. This contributed to Dollar General's lower gross profit, which came in at 30.8% of sales in Q2 2014 versus 31.3% of sales in Q2 2013. Look for the company to firm up pricing in Q3 to ensure that it can hit its top- and bottom-line guidance for the full year.

Also of note

After having its offer rebuffed by Family Dollar's board, Dollar General renewed its commitment to acquiring its smaller rival with a statement in its Q2 earnings release: regards to our proposal to acquire Family Dollar, we remain firmly committed to the acquisition. The financial benefits of our offer to Family Dollar shareholders are indisputable, and the proposed combination would unlock tremendous value for Dollar General shareholders. We continue to believe the potential antitrust issues are manageable and that our transaction as proposed is both superior and achievable.

Clearly, Dollar General is intent on acquiring Family Dollar. We'll see just how far the company is willing to go as time goes on.