Dollar General Corp (DG.N) posted better-than-expected second-quarter results on Wednesday as efforts such as selling cigarettes and more brand-name products attracted customers.
The discount retailer's shares rose about 4.1 percent, or $2.33, to $56.21 in early trading.
Dollar General stood by the lowered full-year profit forecast it gave in June, even though its second-quarter earnings per share was 3 cents better than Wall Street expected.
"They're probably being somewhat cautious given the uncertainty in the economy," said John Tomlinson, head of retail at ITG Investment Research. "Investors are cheering the results. It's a little bit of a relief rally."
When Dollar General cut the top of its full-year profit forecast, it warned of moderating sales growth and declining margins as frugal shoppers were making it difficult to raise prices. However, the 5.1 percent sales growth at stores open at least a year in the second quarter matched the growth it posted a year earlier, and exceeded competitors' results.
Dollar stores have been battling increased competition from Wal-Mart Stores Inc (WMT.N) and other large discount chains, which are increasingly chasing budget-conscious consumers by offering more items priced at $1.00 or less.
Wal-Mart, however, posted a surprising decline in quarterly U.S. same-store sales as people limited discretionary spending due to higher taxes and gasoline prices. The company also cut its full-year revenue and profit forecasts.
Dollar General has been boosting sales for several months by adding tobacco products to its lineup. Selling items such as cigarettes drive sales, as many of its customers tend to use tobacco more often than consumers overall. However, the margins on such products are thin and pressure overall profit margins.
Total sales rose 11.3 percent to $4.39 billion in the quarter, beating market estimates of $4.36 billion.
Same-store sales increased 5.1 percent. Analysts had expected such sales to rise 4.2 percent.
Along with beating the decline in same-store sales at Walmart U.S., Dollar General's same store sales were better than a 3.7 percent increase at Dollar Tree Inc (DLTR.O) and a 2.9 percent increase at Family Dollar Stores Inc FDO.N in the latest periods those rivals reported.
Demand was strong for tobacco products, fresh food, candy and snacks, the company said.
"Much of the sales gain was driven by low margin products that continued to place pressure on the company's gross margin," said BB&T Capital Markets analyst Anthony Chukumba.
Gross profit dropped 65 basis points to 31.3 percent of sales in the second quarter, a smaller decline than in the first quarter, when it fell 89 basis points to 30.6 percent.
People were hoping for anything better than a decline of 90 basis points, Tomlinson said, citing conversations with his clients and others.
The company stood by its June full-year profit forecast of $3.15 to $3.22 per share. Analysts on average now expect it to earn $3.21 per share, according to Thomson Reuters I/B/E/S.
Dollar General earned $245.5 million, or 75 cents per share, in the second quarter that ended August 2, up from $214.1 million, or 64 cents per share, a year earlier.
On an adjusted basis, Dollar General earned 77 cents per share. Analysts had expected a profit of 74 cents per share.
(Reporting by Jessica Wohl in Chicago and Maria Ajit Thomas in Bangalore; Editing by Joyjeet Das and Maureen Bavdek)