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Dollar General profit rises, optimistic on year

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Dollar General Corp. (DG-N) posted bigger-than-expected gains in quarterly sales and profit and raised the low end of its full-year forecast Tuesday, as shoppers visited its discount stores more often to buy food.

"I saw a lot of encouraging signs in the results," said BB&T Capital Markets analyst Anthony Chukumba. He called the second quarter "a great rebound" from the rare shortfall the company posted for the first quarter.

Dollar General, which prices most of the merchandise in its small stores below $10 US, has generally done well as economic woes such as high unemployment, gas prices and food prices push those on very limited budgets to cut back on shopping trips.

U.S. consumer confidence fell in August to its lowest level in more than two years, a new report showed.

The tough economic climate has created more of Dollar General's core customers and is bringing in higher-income shoppers looking for value, Chief Executive Rick Dreiling said during a conference call.

Sales at stores open at least 13 months, or same-store sales, rose 5.9 percent, a faster clip than the first quarter's 5.4-percent rise. Average sales per square foot rose to about $205 from $199 a year earlier.

Dollar General has grown its market share, and has done so profitably, Dreiling said.

Its growth has come at the expense of some other chains.

Same-store sales at Wal-Mart Stores Inc's Walmart, the largest chain by revenue, have fallen for nine straight quarters, though such sales rose in July.

Same-store sales rose 4.7 percent in the fiscal third quarter at Family Dollar Stores Inc., Dollar General's main competitor in the smaller format discount space.

GROSS MARGINS PRESSURED BY BASIC GOODS

Dollar General's gross margin decline was much narrower than in the first quarter, "admirable" given the higher commodity and fuel costs the company faces, Chukumba said.

Dollar General's customers are buying an increasing proportion of lower-margin necessities as they cut back on discretionary purchases. At the same time, the prices Dollar General paid for goods rose due to higher commodity and fuel costs, leading it to raise some prices.

Sales of items such as candy, snacks, pet food and beauty products increased at a higher rate than merchandise such as home, apparel and seasonal goods during the quarter.

Gross profit dipped to 32.1 percent of sales from 32.2 percent of sales a year earlier. Over the first six months of the year, gross profit fell to 31.8 percent from 32.2 percent.

"The second half of this year is setting up quite nicely for Dollar General," said BB&T's Chukumba, who has a "buy" rating on Dollar General and a "hold" rating on Family Dollar.

"The U.S. macroeconomic environment remains challenging, so we should see a continuation of the trade down phenomenon where consumers are trading down to Dollar General from higher-priced alternatives such as supermarkets, convenience stores and drugstores," he said.

The company, which has more than 9,640 stores, more than any other U.S. chain, also said it would start to sell some name brand and private label goods on its website on Sept. 8.

Second-quarter sales rose 11.2 percent to $3.58 billion, above the $3.54 billion analysts were expecting according to Thomson Reuters I/B/E/S.

The retailer earned $146 million, or 42 cents per share, in the fiscal second quarter that ended on July 29, up from $141 million, or 41 cents per share, a year earlier.

Earnings of 52 cents per share, excluding items, exceeded analysts' average forecast of 48 cents.

Dollar General now expects to earn $2.22 to $2.30 per share for its 53-week fiscal year, versus a prior forecast of $2.20 to $2.30 per share.

It expects sales to rise 12 percent to 14 percent, up from a prior forecast of 11 percent to 13 percent. Same-store sales are now expected to increase by 4 percent to 6 percent, versus an earlier forecast of 3 percent to 5 percent.

Dollar General is majority-owned by private equity firm Kohlberg Kravis Roberts & Co LP, which brought the Goodlettsville, Tennessee-based company back to the public market in November 2009.

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