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And then there’s Dollar General . . .

As if escalating tensions with Target weren’t enough of a large format competitive concern for Walmart, Dollar General remains on a roll with its 9,641 value-oriented and conveniently located stores.

The company sounded like it lifted a line from Target’s August sales release earlier this week when it reported second quarter results that exceeded expectations due to an increase in customer traffic and average transaction size.

“Our same-store sales increase of 5.9% in the quarter represents an acceleration from the first quarter and demonstrates our ability to balance the challenges of pricing and rising input costs. Our customers are depending on us even more for the convenience and value we offer,” said Rick Dreiling, Dollar General chairman and CEO. “In this period of economic uncertainty, we continue to focus on factors that we can control, and we still expect to deliver strong financial performance in 2011.”

Dollar General’s total sales increased 11.2% to $3.58 billion, and sales in consumable categories grew at a faster rate than non-consumables. The most significant growth was related to changes in and further expansion of the company’s candy and snacks, packaged foods, and perishables offerings. Slower sales in home, apparel and seasonal categories were blamed on a lack of discretionary spending by consumers.

The increased emphasis on consumables has a negative impact of gross margins, just like at Target, but Dollar General managed to leverage expenses to mitigate the impact on profitability. Net income increased 25% to $181 million, excluding non-recurring charges related to the early repayment of debt and on that same basis, earnings per share increased to 52 cents, four cents better than analysts expected and nearly 24% higher than the prior year profit of 42 cents. As a result, the company increased it full year profit guidance to incorporate the second quarter results and now earnings per share are expected to fall within a range of $2.22 to $2.30.

Gross margins declined, but not as much as feared, dropping to 32.1% in the second quarter from 32.2% the prior year. Conversely, expenses as a percent of sales showed greater improvement, declining to 22.3% from 22.9%. The company said a key driver of the improvement was reduced store labor expense as the company has implemented a labor management program and simplified some of its merchandising processes.

Dollar General will come close to the 10,000 unit mark this year. With 9,641 stores at the end of the second quarter, the company has already opened 301 new stores and remodeled or relocated 371 others as part of a full year plan to open 625 new stores and remodel or relocate 575 others.

 

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