Dollar General Could Be About to Break Out

Dollar General (DG) announced stellar second-quarter earnings this morning, which came it at 77 cents per share and beat the Street’s expectations by 3 cents. Revenue was also better than expected, up 11% year over year at $4.39 billion.

Including one-time items, net income totaled $245.5 million, or 75 cents per share — up from $214.1 million, or 64 cents per share, a year earlier.

Same store sales rose also rose 5%, with a large increase seen in consumables such as tobacco, candy and other snacks. In fact, 75% of the company’s total second quarter revenue was derived from these consumables. Only recently has the company begun selling tobacco products.

Looking ahead, the company is forecasting adjusted full-year EPS to come in between $3.15 and $3.22 — in line with the consensus of $3.21.

Dollar General stock has gained around 5% this morning on the news, while another discount dollar stock was also up in sympathy. Family Dollar Stores (FDO) posted gains early but leveled off, while Dollar Tree (DLTR) has marched up around 3% so far today.

Despite increased competition for the dollar market from Walmart (WMT), the future looks bright for Dollar General stock and the other stocks in this sector. Consumers continue to try to stretch their purchasing dollars in an ongoing tepid economy.

The company has been on a buying spree recently, repurchasing $220 million of its own stock this year, and has another $424 million remaining for further stock buybacks. In addition, Dollar General continues to expand, opening 360 new stores in the first half of 2013 with plans to open 650 by the end of the year. The chain now has a total of 10,866 open stores.

The 52-week price range for Dollar General stock has been a low of $39.73 to a high of $56.91. However, as the accompanying chart shows, the $55 to $56 area was touched several times over the past year, with the stock unable to penetrate that resistance level.

However, on the favorable earnings report out today, Dollar General stock opened at a new 52-week high of $56.15 this morning, before pulling back a bit.

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Investors should watch the action over the next day or two. If the stock can close above today’s opening, that will be very bullish for Dollar General and the other discount store stocks going forward.

This stock action is quite a turnaround from 2012 — a year in which consumer fears were seen as a catalyst for Wall Street to hammer the entire sector down on lowered expectations. However, as you can see from the chart, Dollar General stock has been on a slow and steady rise since 2011, and has more than doubled in price from its early 2011 lows.

Looking ahead to the other stocks in the sector, Family Dollar stores will announce earnings on Sept. 30, while Dollar Tree Stores announces earnings on Nov. 21.

Based on Dollar General’s report this morning, expect analysts to raise their forecasts for those stocks as well. 

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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