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On March 18, 2014, we issued an updated research report on Dollar General Corporation (DG - Analyst Report) following the company’s strong results for the fourth quarter fiscal 2013.

Dollar General’s earnings of $1.01 per share came in line with the Zacks Consensus Estimate and rose 4.1% year over year on the back of growth across the Consumables category. However, net sales fell short of the Zacks Consensus Estimate of $4,617 but increased 6.8% to $4,493.9 million.

We believe that the company’s commitment toward better price management, cost containment, private label offering, effective inventory management, merchandise and operational initiatives will drive sales and margin trends, going forward.

Moreover, Dollar General has displayed remarkable comps growth. The company’s comps remained robust despite unfavorable macroeconomic conditions mainly due to competitive pricing and strategic store expansion plans, including remodeling and relocations. Fiscal 2013 marked the 24th consecutive year of comps growth.

Dollar General now projects first-quarter earnings in the band of 72 to 74 cents and fiscal 2014 earnings between $3.45 and $3.55 per share. For fiscal 2014, total sales are expected to rise by 8% to 9% year over year while comparable-store sales (comps) are expected to increase by 3% to 4%.

Despite a year-over-year rise in its top and bottom lines, the stock has witnessed a downtrend in the Zacks Consensus Estimate, as analysts lowered their estimates to better align with the company’s projection. For the first quarter of fiscal 2014, the Estimate fell 11% to 73 cents. The Estimate for 2014 fell 4.9% to $3.53 while for 2015, it went down 3.3% to $4.12 per share, over the last 30 days.

The increasing gross margin pressure due to rise in sales of low margin-carrying products, remains a concern. Consumables category now accounts for 73% of the fourth quarter fiscal 2013 sales compared with 72% in the prior-year quarter.

Consequently, increased sales of lower margin merchandise weighed on the company’s gross margin, leading it to contract approximately 58 basis points to 31.9% during the quarter under review. Higher inventory shrinkage also hurt margins.

Apart from this, Dollar General operates in a highly competitive discount retail merchandise sector with players like Family Dollar Stores Inc. (FDO - Analyst Report) and Wal-Mart Stores Inc. (WMT - Analyst Report), which is quite challenging.  

Currently, Dollar General carries a Zacks Rank #4 (Sell).

Key Picks from the Sector

Another stock worth considering in the sector is Burlington Stores, Inc. (BURL - Snapshot Report), which has a Zacks Rank #2 (Buy).

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