Discount retailer Dollar General (NYSE: DG) posted a 15% jump in its first-quarter earnings last week and backed its full-year outlook. In spite of the generally good news, though, shares plunged 8% as the numbers failed to match Street expectations.
But Dollar General has seen an overall solid start to its year -- good enough to maintain its annual earnings forecast. This company could be a good deal for investors.
The scenario
Discount retailers have done pretty well so far this year, as rising oil prices and a feeble economic recovery have forced price-sensitive consumers to go bargain-hunting. Low-income shoppers have flocked to stores such as Family Dollar (NYSE: FDO) and 99 Cents Only Stores (NYSE: NDN) in search of bottom-of-the-barrel deals.
To boost its own market share amid this consumer shift, Tennessee-based Dollar General has said it isn't looking to raise prices even in the face of skyrocketing commodity costs, an interesting strategy for a company whose customers are about as loyal to their stores as Survivor competitors are to one another. Investors in Wal-Mart (NYSE: WMT) should know this well; the retail giant has seen U.S. same-store sales slip for eight straight quarters.
A look at the numbers
Revenues for the company in the latest quarter rose 11%, to $3.45 billion. Same-store sales rose 5.4% as a strong a consumables segment heavily aided the top line. The company also opened 139 stores during the quarter and plans to open 625 locations overall this year.
Gross margins fell to 31.5% from 32.1% a year ago, in large part because the company had to implement even greater discounts to attract customers to its stores. But consumables are also lower-margin, so the stronger showing there helped drag overall margins down, too. Going forward, the company has made it a priority to improve these margins.
Cashing in
High gas prices took their toll on the company's bottom line, and further weakness in the company's apparel segment weighed on results as well.
But I think these are just minor blips, as the company seems on track for a strong year ahead. It hopes to earn between $2.20 and $2.30 a share (adjusted) in the current fiscal quarter, with revenues expected to climb by 11% to 13%.
The Foolish bottom line
With more new stores slated to open soon and an increased focus on driving sales growth as well as increasing profitability, Dollar General looks set for a strong year. Investors should take note.
