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The Science of Hitting
The Science of Hitting
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Dollar General - Q2 2011

August 30, 2011 | About:

Dollar General (NYSE:DG), the largest discount retailer in the United States (9,641 stores at the end of Q2) reported second quarter earnings and held a conference call with investors on Tuesday morning. The company and its two main competitors (Family Dollar, Dollar Tree) have proven to be resilient during the economic downturn, with all three up more than 80% in the past five years (Dollar General up more than 150%), compared to a roughly 10% gain on both the S&P 500 and the DJIA. Dollar General has been in the spotlight as of late due a vote of confidence from one the most respected companies in the world: Berkshire Hathaway. While the relatively small investment of less than $51 million suggests that it may be the doings of newcomer Todd Combs, it still draws attention when it comes through the accounts at Berkshire. Here are some of the highlights from the second quarter and the call:

Sales increased to $3.58 billion in the second quarter, up more than 11% from $3.21 billion in revenues in the second quarter of 2010; this was driven by a mix of new stores and 5.9% same store sales growth (lapping 5.1% in the same quarter last year). Despite the double digit increase and mid-single digit comp, management still remained reserve; here is what CEO Rick Dreiling had to say: “However, the macroeconomic environment has remained difficult for consumers who continue to face high unemployment rates, high gasoline, and high food cost.”

For the first half of 2011, total sales increased 11.1% more than $7 billion, including an increase in same-store sales of 5.6 percent. Through the first half of the year, the company has opened 301 new stores and relocated/remodeled 371; this is in-line with full year estimates of 625 new stores and 575 remodels/relocations.

Year over year, gross margin fell slightly (10 basis points) to 32.1%, partially driven by the push towards more sales in consumables (lower margin product offering), plus the increase in both commodity costs and fuel over the past twelve months. Despite lower gross margins, operating profit margins increased 40 basis points to 9.8% of sales, driven by a 54 basis point decline in SG&A.

On a GAAP basis, net income was $146 million ($0.42 per diluted share), compared to net income of $141 million ($0.41) in the second quarter of 2010. After adjusting for losses related to early debt extinguishment of $35.4 million (net of taxes) in this quarter and $3.9 million (net of taxes) in Q2 2010, net income increased 25% to $181 million ($0.52 per diluted share), compared to $145 million ($0.42) in Q2 2010. As a result of the discussed repurchase, total outstanding debt at the end of the quarter was $2.8 billion, down $572 million from a year ago.

Management raised guidance as a result of the strong quarterly performance, and had this to say about their expectations in the back half: “We are increasing the low end of our previous earnings per share guidance by $0.02. We currently expect adjusted diluted earnings per share for the 53-week fiscal year to be in the range of $2.22 to $2.30 assuming 346 million weighted average diluted shares and a full year effective tax rate of approximately 38%... Same-store sales based on the comparable 52-week period are expected to increase 4% to 6%. This is an increase from our previous expectation of total sales increase of 11% to 13% and a same-store sales increase of 3% to 5%.”

The stock was up more than 5% during the day’s session, closing at more than $35/share; after accounting for management’s updated guidance, the stock currently trades at 15-16x expected 2011 earnings.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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