Dollar General margins fall in tough discount market

Reuters
A price sign at a Dollar General store in Arvada, Colorado
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A price sign at a Dollar General store in Arvada, Colorado June 2, 2009. REUTERS/Rick Wilking

By Sruthi Ramakrishnan

(Reuters) - Dollar General Corp reported lower margins and slower-than-expected growth in quarterly same-store sales, reinforcing the need for consolidation among deep-discount retailers as it vies to take over its closest rival.

Chief Executive Rick Dreiling said Dollar General would not relinquish its pursuit of Family Dollar Stores Inc , even though the No. 1 U.S. deep-discount retailer's bid was rejected in favor of a smaller offer from Dollar Tree Inc .

"We truly hope that Family Dollar will come to the table," Dreiling said on a post-earnings conference call on Thursday.

Dollar General's shares rose 1.8 percent, Family Dollar's were marginally higher and Dollar Tree's were up 1 percent.

The company has been struggling to shore up margins after it slashed prices to keep its lower-income shopper base from being lured by retail giants Wal-Mart Stores Inc and Target Corp as well as by Family Dollar and Dollar Tree.

This growing competition among discount chains, always a popular choice for penny-pinching customers in a struggling economy, has intensified pressure to merge.

Family Dollar last week rejected a $9 billion buyout offer from Dollar General that it said could run afoul of competition law, opting instead for Dollar Tree's earlier $8.5 billion bid.

Goodlettsville, Tennessee-based Dollar General said its gross margins fell in the second quarter as it offered more discounts and sold more lower-margin products, such as tobacco. It was the sixth straight quarter without gross margin growth.

Growth in same-store sales slowed for the third consecutive quarter, and the company also cut the top end of its full-year comparable-store sales forecast.

"Dollar General's lackluster results further demonstrate why Family Dollar is a 'must have' property for the company," BB&T Capital Markets analyst Anthony Chukumba wrote in a note.Dreiling said in a statement that the financial benefits of Dollar General's offer for Family Dollar were "indisputable" and that any potential antitrust issues raised by the merger of the two biggest U.S. deep discount retailers were "manageable."

Dollar General has said it would divest 700 stores after it merged. A combination of the two would have nearly 20,000 stores in 46 U.S. states; Dollar Tree and Family Dollar combined would have 13,000 stores in the United States and Canada.

Asked on the call about a "Plan B" should its takeover of Family Dollar fail to materialize, Dreiling said: "I don't want to give up on the deal yet."

BETTER SECOND-HALF MARGINS

Dollar General reported same-store sales growth of 2.1 percent for the quarter ended Aug. 1, below the 2.9 percent estimated by analysts polled by research firm Consensus Metrix.

It said it expected same-store sales to grow 3.0-3.5 percent in the year ending Jan. 31, versus its previous forecast of 3.0-4.0 percent.

S&P Capital IQ analyst Efraim Levy said the company would need Family Dollar to accelerate its profit growth. He said there was a good chance Dollar General would raise its offer, and raised his rating on the stock to "hold" from "sell".

The company said it was working to increase sales of non-consumable items, which have higher margins, and was seeing higher demand for home products and apparel in the $1-$5 range, as well as for back-to-school items.

"We also see the back half of the year being less promotional than what we saw in the front half of the year," Chief Financial Officer David Tehle said on the call.

For the second quarter, Dollar General's gross margins shrank 53 basis points to 30.8 percent.

Dollar Tree reported a lower-than-expected second-quarter profit last week, with its gross margins shrinking by about 80 basis points to 34.2 percent.

Dollar General's shares were up 1.8 percent at $64.87 in afternoon trading on the New York Stock Exchange. To Wednesday's close, they had risen almost 11 percent since the offer to buy Family Dollar.

(Editing by Savio D'Souza and Saumyadeb Chakrabarty)

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