Can Dollar General Retaliate Against Wal-Mart Stores? - TheStreet

Thursday's biggest stock market surprise came courtesy of Dollar General (DG) - Get Report and its unexpected earnings miss. Investors watched as stock in the dollar store, which had been the retail industry's "sleeper hit," slumped nearly 18%. Is it time to abandon Dollar General as a toxic stock?

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As e-commerce websites, led by Amazon, change the way Americans shop and as consumers remain spending-wary following the last recession, dollar and discount stores have been the last bright spot for bricks-and-mortar retail. Along with Dollar Tree and even off-price retailers such as TJ Maxx (which is owned by TJX Companies) and Burlington Stores, Dollar General continued to attract customers.

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When the company announced its second-quarter results Thursday, however, analysts and investors were stunned. Revenue came in at $5.39 billion, a 5.8% year-over-year gain, but nearly $100 million shy of Wall Street's expectations. Dollar General also registered comparable sales growth of 0.7% for the quarter, a big miss from the 2.6% analysts had been expecting.

A stock chart of Dollar General's week looks like one of the Cliffs of Moher, with a sheer plunge to rocky seas. Shares were up only 0.4% late in Friday's session.

A large part of Dollar General's problem this quarter was increased competition from Walmart owner Wal-Mart (WMT) - Get Report , which has been taking on dollar stores recently, offering deep discounts on groceries and everyday items, while at the same time bolstering its fresh-food offerings.

And it's working. In fact, Wal-Mart announced the eight-straight quarter of increased shopper traffic last week. In contrast, Dollar General admitted that it was bringing in fewer customers.

On Thursday, Dollar General CEO Todd Vasos told analysts that the company could begin slashing more prices on its most popular items at a more aggressive rate. During the quarter, Dollar General discounted about 450 of its top-selling products by an average of 10%. It wasn't enough to bring in the customers, who appear to be wandering back to Walmart.

"We believe that these price reductions are meaningful and recognizable to our consumers," Vasos said. "We are committed to further price moves as appropriate over time."

Dollar General isn't the only retailer feeling the heat from Walmart's pricing strategy and revamped grocery division. Dollar Tree also reported lower comparable sales for the quarter than expected. And Target has all but admitted its new fresh-food division is a bit of a flop.

However, Dollar General still isn't a terrible investment. While it's true that Walmart is enticing customers back with big sales, dollar and discount stores should continue to perform well. The quarter wasn't a total flop, either -- in fact, the company still managed to deliver earnings per share growth of 14%. Compare that to what's going on in the rest of retail, with department stores such as Sears preparing to go belly up.

No doubt the company will retaliate against Walmart with strong initiatives to boost sales in the second half of the year. Consider today's low price as a great discounted opportunity to grab shares of this plucky retailer.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.