Dollar General Gains on Upgrade

Shares of Dollar General(DG Quote) gained after an upgrade by a William Blair analyst, who says now is the time to buy the stock, despite lower-than-expected November same-store sales.

Analyst Mark Miller sees sales improving in the near term and lifted the company's investment rating to outperform from market perform. Dollar General closed up 64 cents, or 3.4%, at $19.64.

"Dollar General's sales mix is heavily weighted toward consumable basics that should have a high recurring nature," said Miller. He thinks sales hit a low in November and expects improvement in future comp sales to boost the stock.

"Sales may lift in a less promotional period after the holidays, and low-income consumer spending may improve with higher employment and a larger tax refund in early 2004," he said.

Additionally, the company expects to add refrigeration units to its sales lineup over the next three years, which should add to sales and earnings because the average customer ticket would increase, Miller said.

As a result, Miller says the company could report full-year 2003 and 2004 results above Wall Street's consensus of 94 cents and $1.07 a share, respectively, assuming it manages 2% to 4% increases in fourth-quarter comps.

On Thursday, Dollar General reported that third-quarter earnings beat analysts' estimates, citing an improvement in gross margin performance. Over the past year, Miller said Dollar General's finances have improved "markedly" and have beat analysts' estimates in the past four quarters.

The company's stock, however, has not benefited. Shares are currently down about 9% from late August, compared with the S&P 500, which is up 7%, and the S&P Retail Index's 4% gain.

Also on Thursday, the company said November total sales rose 10% to $575.3 million. Same-store sales were up 1.7%, below the consensus estimate of 3.6%, but higher than a 0.5% increase in the year-earlier period.

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