Dollar General Drop, A Gift Rather Than Panic (DG, FDO, DLTR, NDN, BIG, WMT)

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Dollar General Corporation (NYSE: DG) is getting clipped after its earnings report and guidance is not as rewarding to some of the highest bulls out there.  An obvious secondary offering which should have been expected is the real pressuring point.  Frankly, this should be viewed as a gift for those who wanted to own Dollar General rather than viewed as a panic situation.  Today’s move is also offering the same sort of reaction in  Family Dollar Stores Inc. (NYSE: FDO), Dollar Tree, Inc. (NASDAQ: DLTR), 99 Cents Only Stores (NYSE: NDN), and Big Lots Inc. (NYSE: BIG).

It was just in November that 24/7 Wall St. named Dollar General as one of ten companies to own for the next decade.  The opportunity here is that Dollar General is the leader of the dollar stores and dollar stores currently sit in about the same combined situation where Wal-Mart Stores Inc. (NYSE: WMT) was back in about 1990.  Will this class of stores ever be Wal-Mart?  That is highly unlikely, but that does not mean that the sector is finished.

Dollar General beat earnings at $0.39 EPS vs. $0.35 EPS from Thomson Reuters.  Revenues rose by 10.1% to $3.22 billion, but Thomson Reuters was looking for revenues of $3.23 billion.  Our take is that the company beat on earnings but analysts were expecting too much growth in revenues.

For guidance, it sees 2010 at $1.78 to $1.81 EPS versus $1.78 expected from analysts and versus $1.68 to $1.74 previously offered. For 2011, the company’s guidance is for another year of revenue growth with projections of 10.5% to 11% growth.  That would would imply $13.03 to $13.09 billion, while $13.07 billion was the Thomson Reuters estimates.  This is higher than what the company previously offered for implied growth.  The same-store sales growth was put at 5.0% to 5.5%.

Gross profit for 2010 rose by more than a half-point to 31.4% of sales.  One concern is 12% inventory growth, or about 6% on a per-store basis; and inventory turns were about 5.1 times in 2010.

What is interesting is that SG&A expenses fell by 61 basis points to 22.8%.  Our take here is that Dollar General is the leader of a sector that has a potential secular growth trend behind it.  Not growth from 2009 to 2010 to 2011.  Growth waves from 2010 to 2020.  There are more than 9,200 stores and dollar stores are no longer just dollar stores where everything is only $1.00.  For the permanently displaced and those under permanent pressure, the dollar store category is now the new destination competing with Wal-Mart and the trend could be secular rather than just temporary.