Dollar General's monster quarter

The stocks of discount stores have seen incredible runs this year. For that reason, they may not be the best picks.

By Jonathan Berr Dec 5, 2011 1:55PM
Image: A bunch of dollar bills (© Tetra Images/Getty Images)Can anything slow Dollar General (DG) down?Apparently not -- though that doesn't mean the stock is a good buy.

Net income at the Goodlettsville, Tenn., company rose to $171.2 million, or 50 cents a share, from $128.1 million, or 37 cents, a year earlier. Revenue rose more than 11% to $3.6 billion, fueled by increases in customer traffic and customer spending. The results beat Wall Street consensus forecasts of 47 cents on revenue of $3.57 billion.

The good news didn't stop there. Not only did the chain -- a favorite of Warren Buffett -- announce a $500 million stock buyback, but it also raised earnings guidance for fiscal 2011 to $2.29 to $2.32 per share from an earlier view of $2.22 to $2.30. That beat the $1.82 analysts had expected. Sales during that period will increase about 13%, with same-store sales raising 5.6% to 5.8%. 

The company expects to have opened 625 new stores in fiscal 2011. It operated 9,813 stores at the end of October.

Dollar General, whose shares have surged more than 30% this year, has the wind at its back. The chain, along with rivals Family Dollar (FDO) and Dollar Tree (DLTR), gained market share in the economic slowdown at the expense of larger rivals. The growth was one reason Wal-Mart (WMT) posted nine straight declines in U.S. same-store sales before breaking that slump in the third quarter. 

That trend should continue. Although surveys show consumers are growing more confident, they are still uneasy. Underemployment, which measures the percentage of unemployed workers along with part-time workers who want to work full time, was 18.1% in November, as Gallup notes. That is an increase from 17.8% a month ago and 17.2% a year ago.

Dollar General, though, may not be the best bet for investors who want to play this sector. Its shares trade at a price-to-earnings ratio of 21.1, above the 18.8 multiple of Family Dollar.

Family Dollar and Dollar Tree aren't cheap either. Both also recently posted better-than-expected quarterly results. Family Dollar plans to open as many 500 new stores in fiscal 2012 -- more than a 50% increase over 2011.

Dollar General shares have an average price target of $41.73, near the $40.43 it was trading at Monday. The target for Family Dollar is $58.25, below the $59.54 level where it recently traded. Dollar Tree's multiple is 21.82. The company opened 98 stores in the last quarter and expanded or relocated 24 stores. Its shares traded Monday at $83.57, near their average 52-week target of $85.11.

A better option for investors interested in the discount sector may be Wal-Mart, which trades at a price-to-earnings ratio of 13.08, among the lowest levels in five years. Its shares, which have been hurt by disappointing results, are up more than 8% this year. 

Big Lots (BIG)spooked investors last week with its cautious outlook for the holiday season. Its overall results, however, were good. The company also gave an earnings outlook in line with analysts' forecasts. The stock trades at a reasonable multiple of 13.31. Its shares, up more than 20% this year, are expected to reach $41.22 in the next 52 weeks. Big Lots traded Monday at $37.15.

Dec 5, 2011 7:41PM
The Dollar Store is Wal-Mart's biggest competition right now. You can go in and get what you want at reasonable prices and not fight the big crowd. 
Dec 5, 2011 8:07PM
I started going to Dollar Tree before I go next door to Wally-Mart. I save a bundle on everything from household items to pain relievers to gift wrap. Once in a while I find that the quality I'm looking for isn't there at Dollar Tree. But for a buck, I can afford to experiment!
Dec 5, 2011 8:47PM

I prefer Dollar General to Wal-Mart.  The stores are clean, stocked, the employees friendly and knowledgeable of the inventory.  Except for the time they are down to one checker, the trip in and out is usually pretty quick.  No major parking hassle, not nearly the mess of Wal-Mart with prices par or below.


Dollar General also carries Oxydol, a good detergent from the old days.  I cannot find it anyplace else.

Dec 5, 2011 9:08PM
My daughter is a manager of a Dollar General store. She thrives on the responsibility and takes pride in her work. But, she is expected to work 48 hour weeks for 40 hours pay, and the lack of sufficient time off along with retail work ailments such as repetitive stress syndrome have taken a toll on her health. These amazing profits are not made in the abstract - they are made through the hard work of people like her who are overworked and underpaid.
Dec 5, 2011 9:51PM
Ok then , lets do a little math.  If we divide Dollar General's quarterly profit by the number of stores they operate, and divide that by the number of days in a quarter of a year, we discover that they are making a whopping $191.72  per store per day.  Not much margin for error in a 3.6 billion operation.
Dec 5, 2011 9:01PM
watch the food items though. i never buy anything edible if it was made in china.remember not so long ago when the chicoms raised the protein content of dog food with melamine and a lot of folks pets died needlessly...  what do you think the chicoms are putting into the food they produce thats imported into america for human consumption? would you eat let alone feed your kids a chinese food product? not I says the thin man. dollar stores are good , you just have to be concious of what you are buying.
Dec 5, 2011 8:26PM
i love dg, but we always have to stand in line so long.  never enough checkers
Dec 5, 2011 9:11PM
My hubby used to work at DG a few years back and we always shopped there instead of walmart. The prices are usually better than wal mart and you don't have to deal with all the crazyness a wal mart store usually entails. Good to see that they are doing well:)
Dec 6, 2011 11:41AM
DG is why Walmart is trying to come out with small drug stores.    Sorry it will fail just like the whole designer clothing disaster  that Walmart ended up taking a charge for.

Walmart is a super center store only corner.   Their business model is stuck and not growing any more.
Dec 5, 2011 9:19PM
Does anyone else see why D.G. is doing so good now-a-days? Most D.G.s are in small towns, far away from Wal-mart and  the locals prefer the shorter drive to the D.G. I used to buy everything at  Wal-mart 18 miles away from my house until gas got sky high, so I started shopping at the local D.G. weekly Until they started raising prices on everything. $4.50 for a gallon of milk, $2.90 for a loaf of bread, I now travel the 18 miles to a ( bag-your own grocery store) 1/2 mile past Wal-mart and I pay $1.99 for a gallon of milk and $0.58 for a loaf of bread, $1.58 for a NORMAL SIZE BOX OF CEREAL. So don't get to stupid with your prices Dollar General, It will change, Oh and quit making the packages so small they fall thru the shopping cart.
Dec 5, 2011 8:58PM
we have a dollar tree by us and if you shop smart there are lots of good deals for all of us who are struggling out in the real world.funny thing is i see lots of newer benzos and beemers in the parking lot. i like our dollar tree.
Dec 5, 2011 9:14PM
Hi! I shop at dollar general all the time. It is the only low cost store within 25 miles of my home. I live in the outskirts of the outskirts in the Ozarks. The store is wonderful and since corporate is doing so well:  since I am germ conscious, a registered nurse for over 30 years: why doesn't corporate supply hand sanitizer for it's employees and customers. It is relatively inexpensive and would prevent the spread of virus especially during peak seasons. A note of truth: all walmarts have hand sanitizers available as you walk in so should dollar general as well.
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