Dollar General comp sales growth slows

CHICAGO (Reuters) - Dollar General Corp (DG.N), which sells most of its merchandise below $10, posted slower growth in quarterly comparable store sales, raising concerns that its business was also vulnerable to the weak economy.

The chain had benefited as lower-income consumers shifted away from pricier stores, and even from discounters like Wal-Mart Stores Inc (WMT.N), to save more money on basic goods like food.

But it faced sweeping discounts by Wal-Mart during the quarter as the world's largest retailer emphasized its low-price message. Low-income customers have also cut back nonessential spending further as unemployment remains high and concerns mount over a double-dip recession.

"This has been one of the toughest competitive environments I can remember," Chief Executive Rick Dreiling said during a conference call with analysts.

Concerns over sales growth offset a margin-driven beat in quarterly earnings.

Dollar General's sales at stores open at least a year rose 5.1 percent, exceeding results from many retailers. But that fell short of what some analysts had expected and was down from the 6.7 percent increase seen in the first quarter.

Sanford Bernstein analyst Colin McGranahan said investors could be focused on the same-store sales numbers "given overall concerns around the weakening consumer environment and Dollar General's ability to drive strong sales as it laps the beginning of its new merchandising initiatives."

In recent years, the company increased advertising circulars and expanded store hours to help boost sales.

Dreiling said that Dollar General's sales momentum continued to build as the quarter progressed and said he was "encouraged" with the current quarter's sales thus far.

The retailer said it saw the number of shoppers and average transaction amounts rise during the second quarter, which included July, when consumer sentiment hit a nine-month low.

PROFIT BEATS

The company said profit was $141.2 million, or 41 cents a share, in the second quarter ended July 30, up 50.9 percent from $93.6 million, or 29 cents a share, a year earlier.

Excluding one-time items, Dollar General reported a profit of 42 cents per share, beating analysts' average forecast of 38 cents, according to Thomson Reuters I/B/E/S.

Inventory also rose 12 percent, exceeding the pace of sales growth. The company said inventory rose to support store growth, new merchandise initiatives and overall sales increases.

Dollar General stood by its previously announced plan to open 600 new stores and remodel or relocate another 500 in 2010. It expects capital expenditures to reach $350 million for the year. Dollar General operates about 9,100 stores.

The company also raised its adjusted full-year 2010 earnings forecast to a range of $1.68 to $1.74 per share, with the high end of the range above Wall Street estimates of $1.72 per share. The company had previously said it expected a profit between $1.62 to $1.69 per share.

Dollar General expects same-store sales, or sales at stores open at least a year, to be up by between 4 and 6 percent.

Sales rose 11 percent to $3.21 billion, in line with analyst estimates.

The retailer, which is majority-owned by private equity firm Kohlberg Kravis Roberts & Co KKR.UL, benefited from efficiencies in how it sources the items it sells, helping lift gross profit margins by about 1 percentage point to 32.2 percent.

Dollar General shares were down 16 cents or 0.6 percent at $27.22 on the New York Stock Exchange at midday.

(Additional reporting by Phil Wahba; Editing by Michele Gershberg, Derek Caney and Matthew Lewis)