Investors who take the time to scrutinize Dollar General's (NYSE:DG) third-quarter results will find pearls of good news that bode well for long-term holders.
Dollar General pre-announced its quarterly sales on Nov. 3. Those sales rose 9.5% to $2.1 billion, powered by new store openings, so the only hard news today was the company's earnings. They came in at $0.20 a share, a penny ahead of analysts' predictions and $0.02 less than last year's second quarter.
If earnings are down, where are those pearls? Well, same-store sales increased 1.4% year over year. That may sound weak, but it easily tops the 1% same-store sales declines at Dollar Tree (NASDAQ:DLTR) and Fred's (NASDAQ:FRED). However, it can't compete with industry No. 2 Family Dollar (NYSE:FD), where September and October comps nosed up 2.8%.
For the fourth quarter, Dollar General expects a 1% to 3% increase in same-store sales. For the fiscal year, it's predicting earnings of $1.14 to $1.17 a share, up from $1.02 a year ago. That's not quite the 15% annual earnings growth rate analysts expect for the next five years, but it's close.
Dollar General's done pretty well, considering its rough year. Energy prices drove transportation and other costs upward, and hurricanes caused widespread damage, both of which put a bit of a hurt on gross margins in the most recently ended quarter. In addition, the company changed its method for calculating inventory and gross profits (the latter of which accounted for $0.02 per share).
Based on the $1.14 that analysts expect the company to earn this fiscal year, the stock is selling for a very reasonable 16.4 times forward earnings. That compares favorably with Dollar Tree, Family Dollar, and Fred's, which trade for 14.7, 17.2, and 22.4 times this year's projected earnings, respectively.
Dollar General especially shines in return on equity (ROE), a measurement that determines how well management creates value for shareholders. Dollar General has an ROE above 20%, while Family Dollar and Dollar Tree have ROE's just under 16%, and Fred's trails the group at just below 9%.
Let's add it all up. Same-store sales, the holy grail of retail measures, are up. Earnings are increasing, the stock's earnings multiple is close to its long-term growth rate, and the company's ROE is the industry's best. Add in the strong growth in new store openings and the ongoing share repurchase program, and you'll find plenty of pearls in Dollar General's depths.
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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.
