Market Overview

Dollar General Earnings Preview: Strong Third-Quarter Results Expected

Dollar General (NYSE: DG), which just recently became an S&P 500 component, is scheduled to report its third-quarter fiscal 2012 results early Tuesday, December 11. Investors will be hoping for a fifth consecutive quarter of double-digit revenue growth and earnings per share (EPS) of $0.50 or more.

Expectations

Analysts on average predict that Dollar General will report that revenue for the quarter rose more than 10 percent year-over-year to $3.96 billion. Its per-share earnings are expected to come to $0.60, which would be up from $0.50 per share in the same quarter of last year. That consensus earnings estimate has not changed in the past 60 days, but analysts have underestimated the EPS for the past five quarters. The earnings beats were by five percent or more in the previous three quarters.

Strong second-quarter results prompted Dollar General to boost its full-year guidance and announce an additional $500 million to repurchase shares. It attributed the five percent rise in same-store sales to increases in customer traffic and the average transaction, partly driven by expansion in its snacks and perishable foods department. But the share price pulled back about four percent in the days following the second-quarter report.

Looking ahead to the current quarter, which includes the holiday shopping season, the analysts' consensus forecast calls for sequential and year-over-year growth in both EPS and revenue. So far, full-year EPS are expected to about 17 percent higher, relative to the previous year, on a rise of about nine percent in revenues.

The Company

Dollar General is a discount retailer operating about 10,000 stores in 40 states. The company came public in 2009 and now has a market capitalization near $15.6 billion. The company was founded in 1939, is based in Goodlettsville, Tennessee, and Richard W. Dreiling has been the chairman of the board and chief executive since 2008.

Competitors include Dollar Tree (NASDAQ: DLTR), Family Dollar (NYSE: FDO) and Walmart (NYSE: WMT). Family Dollar's EPS were in line with consensus estimates in the most recent quarter, but Dollar Tree and Walmart exceeded analysts' EPS expectations in their reports.

During the three months that ended in October, Dollar General announced a secondary share offering, expanded its toy section for the upcoming holiday shopping season and expanded its board of directors.

Performance

The long-term EPS growth forecast is more than 17 percent, and price-to-earnings (P/E) ratio is less than the industry average. The operating margin is greater than the industry average, and the return on equity is more than 19 percent. The number of shares sold short is less than two percent of the float. Of the 25 analysts surveyed by Thomson/First Call who follow the stock, 19 recommend buying shares. They believe the stock has some room to run as their mean price target represents about 22 percent potential upside. That target price would be a post-IPO high.

Shares are up about 14 percent since the beginning of the year, despite pulling back about six percent in the past week. The share price has fallen below the 200-day and 50-day moving averages, which formed a death cross last week. Over the past six months, the stock has underperformed Walmart, Family Dollar and the broader markets.

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