Only a few weeks ago, Dollar General (NYSE:DG) reported its July same-store sales, including a note that margins were lower than expected because of higher-than-expected sales of consumables. At the time, the company didn't update guidance, but today the other shoe dropped; investors received confirmation that lower margins will lead to lower-than-expected profits.

The company's warning on Friday evening also opened the door to a revision in full-year guidance when the company reports on Aug. 31. So it's possible that the bad news isn't over yet. That said, any time a stock that isn't glaringly overvalued falls nearly 8% in a day, it's worth taking a second look to see whether investors are overreacting to the bad news.

Dollar General's trailing P/E of 12 screams "cheap," but we Fools are always more curious about a business's free cash flow. On this metric, Dollar General seems a bit less cheap. Using the company's trailing-12-month free cash flow of $186 million, and running a spreadsheet-powered discounted cash flow analysis, I find 20 years of 6% growth and 3% terminal growth priced into the company's shares. That's a bit pricier than the P/E alone would indicate.

Taking a different view, and using the company's average free cash flow over the last four and a half years, reduces the expectations priced into the stock to 4.5% growth for 20 years and 3% terminal growth. That may be more achievable, and it does appear that the company's capital expenditures have been elevated the last two years, which seems to be depressing Dollar General's free cash flow in the near term.

That said, this company must compete with all kinds of low-priced retailers, from Inside Value selection Dollar Tree (NASDAQ:DLTR) and Stock Advisor selection Family Dollar (NYSE:FDO) on the low end to Target (NYSE:TGT) and fellow Inside Value selection Wal-Mart (NYSE:WMT) on the higher end. In short, it's a tough environment for a company to distinguish itself, and an equally difficult place to earn growing returns on capital. To top it off, there's now evidence that a strategy focused more on consumable goods may win the company sales -- but only at the cost of profits.

As you've probably guessed, it would take a dream valuation -- say, 0%-1% growth priced in -- to get me interested in Dollar General, particularly given its current declining levels of profitability. That said, such a scenario may unfold in a little more than a week, when the company provides its earnings report and potentially updates its guidance. Until then, I see little reason to do anything more than sit tight.

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At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.