Earnings miss doesn’t derail Dollar General’s growth

Sales and profits continued to pile up at the nation’s largest dollar store operator during the first quarter as shoppers sought value at the retailer’s 9,500 stores.

The company reported a 5.4% increase in same-store sales and said total sales increased 10.9% to $3.45 billion during the quarter ended April 29. Profits adjusted to account for several one-time items increased 14% to $166 million, while earnings per share of 48 centers were two cents shy of analysts’ consensus estimate due to gross margins pressures.

An earnings miss is typically disconcerting to investors, but in Dollar General’s case the shortfall was offset by stronger than expected sales growth and an expansion story that remains intact. The 5.4% first quarter same-store sales increase was on top of the prior year’s first quarter gain of 6.7% and the company noted the improvement results from a blend of increased customer traffic and higher average transaction sizes. The addition of new stores also helped the top line as the company opened 139 new stores and relocated or remodeled another 184 units.

“Dollar General is off to a great start in 2011,” said Rick Dreiling, Dollar General’s chairman and CEO. “As I look back on the first quarter, we maintained our focus on serving our customers and worked to hold the line where we reasonably could when it came to raising prices in an environment of rising commodity and fuel costs. Our customers are depending on Dollar General more than ever for consistent value and convenience.”

The decline in gross margins to 31.5% from 32.1% that caused the earnings miss resulted from the combination of markdowns of winter home and apparel merchandise and increase sales of lower margin consumables. Pressures in those areas were offset by reduced inventory shrink and greater distribution efficiency, according to the company.

“In spite of expected gross margin headwinds, we remain well positioned to deliver on our financial outlook for fiscal 2011 as we invest for the long-term health of the company,” Dreiling said.

The company’s full year expansion plans call for the addition of 625 new stores and the remodel or relocation of approximately 550 stores.


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