Dollar General Corporation (NYSE: DG) is getting clipped after its earnings report and guidance is not as rewarding to some of the highest bulls out there.  An obvious secondary offering which should have been expected is the real pressuring point.  Frankly, this should be viewed as a gift for those who wanted to own Dollar General rather than viewed as a panic situation.  Today’s move is also offering the same sort of reaction in  Family Dollar Stores Inc. (NYSE: FDO), Dollar Tree, Inc. (NASDAQ: DLTR), 99 Cents Only Stores (NYSE: NDN), and Big Lots Inc. (NYSE: BIG).

It was just in November that 24/7 Wall St. named Dollar General as one of ten companies to own for the next decade.  The opportunity here is that Dollar General is the leader of the dollar stores and dollar stores currently sit in about the same combined situation where Wal-Mart Stores Inc. (NYSE: WMT) was back in about 1990.  Will this class of stores ever be Wal-Mart?  That is highly unlikely, but that does not mean that the sector is finished.

Dollar General beat earnings at $0.39 EPS vs. $0.35 EPS from Thomson Reuters.  Revenues rose by 10.1% to $3.22 billion, but Thomson Reuters was looking for revenues of $3.23 billion.  Our take is that the company beat on earnings but analysts were expecting too much growth in revenues.

For guidance, it sees 2010 at $1.78 to $1.81 EPS versus $1.78 expected from analysts and versus $1.68 to $1.74 previously offered. For 2011, the company’s guidance is for another year of revenue growth with projections of 10.5% to 11% growth.  That would would imply $13.03 to $13.09 billion, while $13.07 billion was the Thomson Reuters estimates.  This is higher than what the company previously offered for implied growth.  The same-store sales growth was put at 5.0% to 5.5%.

Gross profit for 2010 rose by more than a half-point to 31.4% of sales.  One concern is 12% inventory growth, or about 6% on a per-store basis; and inventory turns were about 5.1 times in 2010.

What is interesting is that SG&A expenses fell by 61 basis points to 22.8%.  Our take here is that Dollar General is the leader of a sector that has a potential secular growth trend behind it.  Not growth from 2009 to 2010 to 2011.  Growth waves from 2010 to 2020.  There are more than 9,200 stores and dollar stores are no longer just dollar stores where everything is only $1.00.  For the permanently displaced and those under permanent pressure, the dollar store category is now the new destination competing with Wal-Mart and the trend could be secular rather than just temporary.

Our own growth targets are short of 10%.  That can become problematic at the stage the company is in.  Debt is now down about 20% to $3.29 billion and the real weakness today is more because of a 25 million share sale filing from private equity owners selling more shares now that shares have risen.  Buck Holdings is the entity owned by KKR, Goldman Sachs, and others; it is the one selling 24.297 million shares of 25 million share offering.

Our thesis is that investors are being given a shot here to get in on the cheap.  When we published the ten stocks to own for the next decade, shares were at $28.58 on the prior close.  The 7.5% drop to $30.91 is still well above that level and the close of $33.43 on Friday before this morning’s earnings looks to be the among the highest closing prices since its re-IPO in November of 2009.  Today’s move is profit taking, a small reality check on acceptable growth rates, and the notion that shares are being diluted by another offering which we already told you would come after each successive move higher.  We want to give you yet another notice that Buck Holdings will hole more than 240 million shares still after this 25 million share offering.

As you would expect when the leader of the pack is down this much, comparable peers are mostly lower as well.  Family Dollar Stores Inc. (NYSE: FDO), Dollar Tree, Inc. (NASDAQ: DLTR), and 99 Cents Only Stores (NYSE: NDN) are mostly lower.

Family Dollar Stores Inc. (NYSE: FDO) is down only 0.5% at $50.83; Dollar Tree, Inc. (NASDAQ: DLTR) is down 2.3% at $55.24; and the troubled player of the group, 99 Cents Only Stores (NYSE: NDN), is actually up 0.75% at $16.13.  Big Lots Inc. (NYSE: BIG) is not exactly a ‘dollar store’ but it caters to many of the same shoppers.

Update at 4:30 PM EST: Dollar General Corporation (NYSE: DG) closed down 7.3% at $30.99; Family Dollar Stores Inc. (NYSE: FDO) closed down 0.3% at $50.92; Dollar Tree, Inc. (NASDAQ: DLTR) closed down 2.65% at $55.04; 99 Cents Only Stores (NYSE: NDN) closed up 0.56% at $16.10; and Big Lots Inc. (NYSE: BIG) closed down 3.15% at $28.57.

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JON C. OGG

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