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With the stock up 25% this year and trading near its all time high, Dollar General (NYSE:DG) has had a good year so far. Dollar stores made an impact during the recession of 2008; however, the economy has improved since then but still, these stores have thrived.

Dollar stores might not be delivering double-digit growth, but they still remain a good investment opportunity. Therefore, Dollar General second quarter earnings, due out on September 4, will play an important role in determining how the stock performs and what to expect from the industry on the whole.

On Revenue

Analysts, according to Yahoo! Finance, expect Dollar General to report revenue of $4.36 billion, which, if achieved, would translate into a growth of 10.30% from the same quarter last year. But Dollar General should easily achieve it as it is within the company's comfort zone, because in its last meeting, the company itself had called for a 10% to 11% hike in sales on a comparative basis.

Further, the revenue estimate has remained the same in the last 90 days, so I believe that the market is also positive that Dollar General should not have difficulty in meeting the target.

On Earnings

Though the top line is expected to be up more than 10% from last year, the bottom line is expected to be 7.8% higher than the same period to $0.74 per share.

Let's analyze the company's past year's earnings.

Quarter ended

Estimated Earnings

Actual Earnings

Surprises

July 2012

0.64

0.69

7.8%

Oct 2012

0.60

0.64

5%

Jan 2013

0.90

0.97

7.8%

April 2013

0.71

0.71

0%

In the last four quarters, Dollar General has not only reached analysts' estimates but on three out of four occasions, it has beaten them. Moving forward, if the trend continues, Dollar General's earnings should easily meet the consensus estimate of $0.74.

Over the last 90 days, the EPS estimate has been adjusted from $0.76 per share to $0.74 per share, as Dollar General's management expects the gross margins to contract for the year because of the continuous change in mix which is getting more concentrated on low margin carrying consumables while there has been a steep fall in the inventory and sales of high margin carrying non-consumables.

Outlook

Dollar General, with 10,662 stores in May, is the largest among all dollar stores. On the other hand, Family Dollar (NYSE:FDO) and Dollar Tree (NASDAQ:DLTR) have over 7,100 and 4,750 stores, respectively. Dollar General is growing and in the last five years, the company's same-store-sales have increased more than 30%.

Going forward, comp sales are expected to increase 4%-5%. Further, the company seems to be in line with its target of opening around 635 new stores this year, and remodel or relocate about 550 stores.

The company is going strong and still enjoys a decent operating margin of 9.33%, well ahead of Family Dollar's 7.37%, but the concern remains that margins are shrinking, though the revenue is increasing as discretionary sales are falling. Further, as the store count increases, it should be kept in mind that the new stores don't cannibalize the sales of existing stores.

Competition

Family Dollar has been in trouble for some time now, and it is finding it difficult to maintain its margins. Despite a decent third-quarter, the company has got a downgrade from Deutsche Bank, as its outlook remains weak and same-store-sales are expected to increase 2%. In the fourth quarter, the company's sales of discretionary products will remain under pressure and so will the margins.

Further, what concerns me about Family Dollar is its store expansion plans. The company has plans to open 500 plus stores this year and to have 23,000 stores in total. As the margins for the company do not seem to be improving and competition increasing, it might put a question mark on its survival as new stores mean additional expenses. Moreover, the company has been cutting its guidance in the past which has affected investors' confidence.

In the recently reported results, Dollar Tree came up with some attractive numbers, reporting net sales of $1.86 billion, an 8.8% increase compared to the same period last year. Same-store sales also increased 3.7%. The company reported profits which were up 10% to $0.56 a share. Despite being the smallest among dollar stores, Dollar Tree has been successful by concentrating on offering merchandise at a single price point of $1.

Dollar Tree has been able to stay ahead of competition because of its strategies right and focus on expanding smartly. The company has been able to maintain its operating margin at 12.93% as it has attracted customers to its stores with candies, stationery, and health care products which hold better margins than consumables.

Going forward, Dollar Tree Looks well positioned to benefit from the increase in sales from the back-to-school and fall selling season. The company expects low- to mid-single-digit same-store sales growth and EPS of $0.54-$0.59 and revenue of $1.87 billion to $1.92 billion for the third quarter.

Take Away

Although the U.S. economy is recovering, evident from all-time highs of stock market and improved housing market, it seems that everyone has not been benefited from it and the rich have gotten richer. As most of the population still remains cautious about spending due to weak disposable-income growth, dollar stores should continue to generate decent growth in its sales.

Though revenue is expected to improve but as the margin is falling and competition is rising, as all the dollar stores are expanding, it might all boil down to survival of the fittest. Among the dollar stores, Dollar Tree seems to be in the best position followed by Dollar General.

Source: Earnings Preview: Dollar General