A dollar doesn’t seem like it would buy much these days, but don’t tell that to the bevy of “dollar” retailers collecting plenty of greenbacks in the latest quarter. This group of deep-discount stores just got a big shot in the arm from one of its biggest names, Dollar General (NYSE:DG).
On Monday, Dollar General came in with a Q4 EPS of 97 cents, easily besting the consensus forecast of only 90 cents. The company also provided an upbeat forecast for 2013, saying that adjusted earnings would be between $3.15 and $3.30 per share. Current Street expectations are for full-year EPS of $3.27 per share.
DG shares spiked in Monday trading, but thanks to renewed jitters over the situation in Cyprus, the market pulled back sharply midday, shaving off some of DG’s intraday gains. Still, the stock finished Monday’s trade higher by more than 2%.
In early Tuesday trading, DG shares were up more than 1%, as buyers reacted positively to Citibank Investment Research analyst Deborah Weinswig’s upgrade of the stock. In a note to clients, Weinswig raised her price target on DG shares to $67 from $65, while maintaining her current “buy” rating on the stock.
The Citi analyst wrote that improvements in gross margins helped the shares beat EPS expectations. She also wrote that growth in sales and earnings should improve throughout the year as a renewed focus on sales of goods such as tobacco, beer and liquor kick in.
Now, to be certain, shares of Dollar General have had an outstanding start to 2013. The chart of DG shows a big spike in the stock since the beginning of the year — a move that has sent DG up about 20% in 2013. Of course, if you look at the downbeat performance of DG shares in the second half of 2012, you can see a very different attitude on the part of traders toward the stock.
This same technical pattern can be seen in other stocks in the deep-discount space, including Dollar Tree (NASDAQ:DLTR) and, to some extent, Family Dollar Stores (NYSE:FDO). In the case of DLTR, the shares are up about 19% so far in 2013, but that was after an extended second-half 2012 plunge of more than 22%.
As for Family Dollar, the shares held up much better in the latter half of 2012 than their competition, but a big plunge at the end of the year has kept FDO shares in the red so far in 2013.
The key here for retailers in the deep-discount space is gross margin. If these stores can manage to keep more of each dollar it brings in, we’ll see improvement in the bottom line akin to what we saw Monday from Dollar General.
If the rest of the stocks in the space can do the same thing, then all three — DG, DLTR and FDO — could very well continue moving toward their respective 2012 highs.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.