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Dollar General Corporation (DG - Analyst Report), an operator of a discount retailer in the southern, southwestern, midwestern, and eastern United States, reported healthy second quarter 2012 results. The company’s quarterly earnings of 69 cents per share came in ahead of the Zacks Consensus Estimate of 64 cents. Moreover, it handily outperformed the year-ago earnings of 52 cents, registering an upside of 33% year over year, mainly due to increased sales and higher gross margin.

Quarterly Details

Dollar General’s total revenue grew 10.4% in the quarter to $3,948.7 million from $3,575.2 million in the comparable prior-year quarter. Higher sales were primarily driven by an improvement of 5.1% in comparable store sales over the prior-year due to higher average transaction and customer traffic. However, total revenue missed the Zacks Consensus Estimate of $3,959 million.

During the quarter, consumable goods increased at a superior rate compared with non-consumable goods mainly driven by company’s expansion initiatives. Moreover, the company’s home and seasonal categories along with some departments in apparel, accessories, sleepwear and intimates also experienced sales growth.

Dollar General’s quarterly gross profit climbed 10.0% year over year to $1,263.2 million, while gross margin contracted 10 basis points to 32.0%. The increase in gross profit was mainly attributable to higher initial inventory markups and decline in fuel cost with better transport efficiency.

Adjusted operating income for the quarter grew 10.9% to $388.1 million, while operating margin remained almost flat at 9.8% compared with the year-ago period, primarily benefiting from a contraction in selling, general and administrative expenses as a percentage of sales.

Balance Sheet

Dollar General ended the second quarter with cash and cash equivalents of $134.2 million compared with $113.1 million at the end of the prior-year quarter. The company had an outstanding long-term obligation (including the current portion) of $2,887.6 million as of August 3, 2012. During the first six months of fiscal 2012, the company spent $304 million on capital expenditure.

Share Repurchase

During the quarter, the company’s board of directors approved an additional share repurchases of $500 million without any time limit in relation to expiry of such authorization. This approval brings the total authorization of share repurchases to $1 billion, including the approval of $500 million sanctioned in December, 2011. To date, the company has already bought back 11.7 million shares worth $485 million.

Stores Update

During the six-month period, the company further expanded its stores network by opening about 295 stores, shutting down 29 stores as well as renovating and relocating 416 stores. This brings the company’s total store count to 10,203, increasing the total square footage area by 7.3%

Raised Outlook

Based on the better-than-expected second-quarter 2012 results, along with impressive start of the third-quarter, Dollar General raised its outlook for fiscal 2012. The company now anticipates same-store sales to increase in the range of 4% - 5%, higher than its prior guidance of low end 3%. Moreover, the company now projects adjusted earnings in the range of $2.77 - $2.85 per share for fiscal 2012 compared with its prior guidance range of $2.68 - $2.78 per share. Further, the company forecasts operating profit to lie in the range of $1.64 - $1.66 billion, better than its previous guidance of $1.62 - $1.66 billion.

Our Recommendation

Dollar General Corporation, which faces stiff competition from Family Dollar Store Inc. (FDO - Analyst Report) and Dollar Tree Inc. (DLTR - Analyst Report), carries a Zacks #2 Rank implying short-term Buy rating on the stock for the next 1-3 months.

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