Dollar General, A Secular Change Winner (DG, DLTR, NDN, FDO, BIG, WMT, BRK-A, KKR)

Dollar General Corporation (NYSE: DG) is packing a punch after earnings this morning after beating earnings and raising guidance.  The dollar store, or actually ‘under $10 and under $5 store’ said that net income rose over 3% as sales rose about 10%.  Same-store sales rose 5.9% in the quarter. Earnings came in at $146 million, or $0.42 EPS, and adjusted earnings were reported as $0.52 EPS.  Sales were $3.58 billion.  The consensus estimate was $0.48 EPS and $3.54 billion in sales.

Dollar General raised the lower-end of its guidance as well and sees the year coming in at $2.22 to $2.30 EPS versus a prior range of $2.20 to $2.30 EPS.  The company also sees 12% to 14% sales growth this year, up 1% on each side from prior targets.  Same-store sales are also now expected at 4% to 6%, 1% higher on each side than a prior forecast.

The news is good news for “dollar and low-priced stores” rivals like Family Dollar Stores Inc. (NYSE: FDO), Dollar Tree, Inc. (NASDAQ: DLTR), and 99 Cents Only Stores (NYSE: NDN).  It is no wonder that M&A interest is in the sector.  Last week we saw some of the same from Big Lots Inc. (NYSE: BIG) for its close-out sales that are discounted but not always anywhere near $1.00.

The reality is that this all spreads more bad news for the likes of Wal-Mart Stores Inc. (NYSE: WMT).  In many ways, dollar store chains are the “The New Wal-Mart” if you go back to the early 1990s.

Dollar General is one of our Top Stocks To Own for the Next Decade.  It is also a recently added Warren Buffett stock as Berkshire Hathaway Inc. (NYSE: BRK-B) has almost 1.5 million shares of common stock now.  That Buffett stake is likely to increase as Buffett and his portfolio managers understand the secular trends here.

Kohlberg Kravis Roberts & Co. (NYSE: KKR) still has control over Dollar General.  The one caveat we have always had with this one is that insiders tend to unload blocks of shares when there is a price spike.  We would not be surprised if that happens again, and that dip is most likely just another opportunity to get in cheaper.

Earlier in the pre-market we had shares up at $35.50, which would have been a new 52-week high.  With an hour until the open, the stock is up almost 3% at $34.80 and the 52-week trading range is $26.64 to $35.09.

Challenging 52-week highs even with a huge share overhang is more than impressive enough.  Dollar General is a winner of “the trade-down economy” and this does not seem to be just a fad.  This seems to be a secular trend, and the company manages to keep reaching up for more and more business as well.

JON C. OGG