UPDATE 2-Dollar General clips profit forecast as shoppers opt for low-margin goods

Tue Jun 4, 2013 11:22am EDT

* First-quarter adjusted EPS $0.71 vs est $0.71

* Revenue rises 9 pct to $4.23 bln vs est $4.24 bln

* Cuts top end of 2013 EPS view to $3.22 from $3.30

* Shares down 7 pct

By Maria Ajit Thomas

June 4 (Reuters) - Discount chain Dollar General Corp cut the top end of its full-year profit forecast, warning of moderating sales growth and declining margins as frugal shoppers make it difficult to raise prices.

The forecast dragged down shares of Dollar General and those of its rivals.

Value retailers such as Dollar General, Family Dollar Stores Inc and Dollar Tree Inc did well during the economic downturn when more customers focused on bargains.

But sales growth has slowed, with many retailers blaming U.S. payroll tax hikes that went into effect early in the year for a drop in discretionary spending.

Dollar General hopes to boost sales by offering tobacco products. But while this is expected to drive sales in coming quarters, margins on such products are thin.

Chief Executive Rick Dreiling said sales of non-consumable items -- higher-margin goods such as home products and apparel -- are expected to remain under pressure, while sales continue to shift to lower-margin items sold under the consumable category. The consumables business includes packaged food and cleaning products.

"We believe that our customers' dependence on our everyday low pricing ... has never been greater," Dreiling said.

Dollar General shares were down 7.5 percent at $$49.50 in early trading on Tuesday. Family Dollar shares were down 3 percent, while those of Dollar Tree were off 1 percent.

"You have a difficult demand environment for the low-end consumer, with a lack of wage growth and the payroll tax hikes," Sanford C. Bernstein analyst Colin Mcgranahan said.

Family Dollar cut its annual profit forecast in April for the second time this year.

Dollar stores are also facing growing competition from Wal-Mart Stores Inc and other large discount chains, which are increasingly chasing budget-conscious consumers by offering more items priced at $1.00 or less.

DECLINING MARGINS

Dollar General, which says about 25 percent of its merchandise is priced below $1.00, cut the high end of its full-year earnings forecast range to $3.22 per share from $3.30. The low end is unchanged at $3.15.

Analysts on average were expecting a profit of $3.28 per share, according to Thomson Reuters I/B/E/S.

Dollar General said it expected same-store sales to increase by 4-5 percent through the year as key initiatives, including the roll out of tobacco products, gain traction.

Dollar General's gross margin fell 89 basis points to 30.6 percent in the first quarter ended May 3.

Same-store sales rose 2.6 percent, while overall sales increased 9 percent to $4.23 billion, slightly below the average market estimate of $4.24 billion.

Net income rose to $220.1 million, or 67 cents per share, from $213.4 million, or 63 cents per share, a year earlier.

On an adjusted basis, Dollar General earned 71 cents per share, in line with analysts' estimates.

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