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Dollar Tree, Inc. (DLTR), Family Dollar Stores, Inc. (FDO): Dollar General Corp. (DG) Remains an Outperformer

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The dollar store sensation may be a played-out investment thesis at this point, especially since the big-box players have fought back hard, but that may not be enough to stop Dollar General Corp. (NYSE:DG). The store released its earnings Wednesday morning to a Wall Street anticipating the continuation of attractive growth and industry outperformance. High analyst expectations have a habit of disappointing investors, but, luckily, not this time. Moreover, in the long run, Dollar General holds some appealing traits as a retailer. As the market digests earnings, here’s what you should focus on for the heavy-discount, small-format retailer.

Dollar General Corp. (NYSE:DG)

Great expectations

With a stock up nearly 140% over a five-year period, at its 52-week high, and with same-store sales figures that far, far outpace the behemoths of discount retail (read: Wal-Mart Stores, Inc. (NYSE:WMT) ), the risk of falling flat has become an increasing concern for Dollar General Corp. (NYSE:DG) investors and analysts. Earlier in 2013, analysts cut estimates as management issued cautious outlook — now proven to be a prophetic statement for all of the retail industry.

This quarter, though, Dollar General Corp. (NYSE:DG) continued to deliver on expectations and beyond. For the second quarter, the company brought in $245.5 million in net income, or an adjusted $0.77 per share. Last year’s number was $0.64 per share, and analysts were expecting around $0.74 per share, giving this quarter solid gains all around and aiding in sending the stock up nearly 5% on the day.

Same-store sales rose an impressive 5.1%. This is particularly encouraging given that three months ago management warned of moderating sales growth, increasing competition, and pressured margins. According to Yahoo! Finance, Dollar General Corp. (NYSE:DG)’s same-store sales growth came in ahead of its competitors — Dollar Tree, Inc. (NASDAQ:DLTR) and Family Dollar Stores, Inc. (NYSE:FDO) at 3.7% and 2.9%, respectively.

Despite all of the great news for the just-ended quarter, management remained very cautious looking forward and stuck by its lowered full-year profit guidance of $3.15 to $3.22 per share.

Does this mean Dollar General Corp. (NYSE:DG)’s big gains are over with for the time being? Not necessarily.

Good value all around

Even though the stock has done quite well and the big-box competitors are offering more and more $1-or-less goods, the prospects for Dollar General remain compelling, especially considering valuation.

The stock trades at just more than 15 times forward earnings — more expensive than Wal-Mart Stores, Inc. (NYSE:WMT)’s 13 times forward earnings but with a more attractive business. In the previous quarter, Wal-Mart saw its same store sales fall, prompting a stock sell-off and fear that the retailing giant couldn’t find growth. Compared to its dollar store peers, Dollar General trades at a P/E discount to Family Dollar Stores, Inc. (NYSE:FDO) (16.88 times) and Dollar Tree, Inc. (NASDAQ:DLTR) (16.58 times).

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