UPDATE 3-Dollar General profit tops expectations, shares up

Mon Mar 25, 2013 12:00pm EDT

* Profit 97 cents per share vs analysts' view 90 cents

* Sees same-store sales up 4-6 pct in '13, up 4.7 pct in '12

* Shares up modestly at $50.26 after big morning gains

By Jessica Wohl

March 25 (Reuters) - Dollar General Corp said on Monday sales growth this year could surpass the strength it saw in 2012 as demand for food and other goods, including cigarettes, helps drive gains despite consumers' concerns about the economy.

Dollar General asserts that it can do well in a tough economy. The discount chain is adding more coolers to stock everything from milk to frozen dinners, is starting to sell tobacco products and is stocking more its own private-label goods, which carry higher profit margins than branded items.

"When times get tough is when the customer needs us even more. I think part of the reason I'm so bullish on '13, it's very probably things are going to be a little harder out there," Chief Executive Rick Dreiling said on a conference call.

The company's fourth-quarter profit came in well ahead of analysts' expectations despite lighter-than-anticipated sales growth. Its shares rose 5.7 percent to their highest level since September in early trading, and were up modestly later on.

The results were "reasonably solid ... despite a challenging environment and sluggish consumer," said Bernstein analyst Colin McGranahan, who rates Dollar General shares "outperform."

Dollar General generally does well when economic concerns push consumers on limited budgets to cut spending. It prices most of its merchandise below $10, and about 25 percent of the items it carries are priced at $1 or less.

However, competitors led by Wal-Mart Stores Inc's Walmart chain have stepped up their focus on goods priced at $1 or less, putting added pressure on the so-called dollar stores such as Dollar General. Those chains have responded by stepping up their advertising and starting to sell items such as cigarettes to bring shoppers into their stores more often.

In stores where Dollar General has started to sell tobacco products, it is seeing more shoppers come in and it is selling 33 percent more of those goods than it thought it would, Dreiling said. Still, Dollar General recognizes that those increased sales will add pressure to profit margins, as tobacco products carry lower margins than many products it carries.

Shares of Dollar General were up 28 cents at $50.35 in midday trading.

Through Friday, the shares were up 13.6 percent this year, surpassing rivals after tumbling in December when the company's forecast suggested the fourth quarter could be weaker than Wall Street anticipated. Shares of Family Dollar Stores Inc were down 3.2 percent in that period, while shares of Wal-Mart were up 8.9 percent.

PROFIT UP

Dollar General, with more than 10,500 stores in rural and urban parts of the United States, positions itself as being more convenient than big-box stores such as Walmart. Amid rising gasoline prices, proximity to low-income shoppers is key as consumers want to make shorter trips.

High gasoline prices can also pressure Dollar General's transportation costs, and with tough price competition it cannot always raise prices to offset those higher costs.

Dollar General earned $317.4 million, or 97 cents per share, in the fourth quarter ended on Feb. 1, up from $292.5 million, or 85 cents per share, a year earlier.

Sales rose 0.5 percent to $4.21 billion.

Analysts, on average, expected 90 cents per share on sales of $4.26 billion, according to Thomson Reuters I/B/E/S.

More shoppers came into the stores and spent more on their purchases, the company said.

Items such as soft drinks, chips and candy sold well and healthcare sales were driven by a busy flu season. Still, shoppers were cautious with their discretionary spending and were focused on value, Dollar General said.

Sales at stores open at least a year, or same-store sales, rose 3 percent. The same-store sales surpassed a 1 percent rise in such sales at Walmart U.S. in its fourth quarter, yet came in at the low end of Dollar General's forecast of 3 to 4 percent growth.

Gross profit as a percentage of sales rose to 32.5 percent from 32.2 percent a year earlier, helped by factors such as a drop in an inventory charge and better transportation costs.

Dollar General expects to earn $3.15 to $3.30 per share on an adjusted basis this year, with total sales up 10 percent to 12 percent and same-store sales up 4 percent to 6 percent.

Analysts anticipate a full-year profit of $3.27 per share.

Total sales rose 8.2 percent in 2012, or 10.4 percent excluding the impact of an extra week in 2011. Same-store sales rose 4.7 percent.

Dollar General also said its board authorized an additional $500 million in share repurchases, bringing the total available for buybacks up to $644 million. The company bought 14.4 million shares last year for $671 million.

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