Meredith Derby

Return to Article

Dollar General Gains on Upgrade

Meredith Derby

Shares of Dollar General(DG) 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.

In December, the company sees same-store sales rising 2% to 4%, with total sales up 10% to 12%. The Goodlettsville, Tenn.-based company operates more than 6,700 stores. The company had said in mid-November that it plans to open 675 stores in the fiscal year beginning Jan. 31, 2004.

The upgrade of Dollar General is interesting in light of analysts' concerns over lagging sales in the "dollar" space. SunTrust analyst Patrick McKeever recently noted that the low-income consumer might not be spending as much with the holidays still weeks away. He believes spending might pick up as the holidays draw closer because people will be shopping "close to need."

In addition, Citigroup Smith Barney analyst Deborah Weinswig noted in a recent research report "the low-end consumer remains pressured by a tough job market and has faced liquidity issues, as evidenced by the pronounced paycheck cycle."

At another dollar discounter, Family Dollar Stores(FDO), McKeever expects to see the same trend of customers buying closer to the holidays. Family Dollar reported that November same-store sales were up 0.7%, below McKeever's projection for a 4% to 6% rise. Total sales rose 10%.

McKeever noted that the pipeline will remain challenging for the dollar discounters as other discounters, such as Wal-Mart(WMT) and Costco(COST) use promotions such as "early bird specials" to get customers in the door, which could continue through January.

Still upbeat on the dollar sector, Miller also recommended that investors buy shares of Family Dollar as well as Fred's(FRED).