Dollar General Makes Lemonade in the Second Quarter

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Off-price retailer Dollar General (NYS: DG) recently posted better-than-expected second-quarter earnings. The Tennessee-based retailer reported a 25% jump in its adjusted quarterly earnings -- but when certain items were included, its profits grew a meager 3%.  

The quarter
Dollar General, which is majority-owned by private equity firm KKR (NYS: KKR) , reported a more than 11% increase in its top line to $3.58 billion. The company reported a 3% increase in net income to $146 million. Ignoring losses due to early repayment of debt, net income grew by 25% to $181 million.

Same-store sales, an important metric used to gauge the health of retailers, grew 5.9% as the company tried to balance the pressure of pricing and soaring input costs. And it seems to have done well. Operating profit jumped 16% to $350 million. This was as a result of increased pricing and better management of inventory and costs.

Macroeconomic view
The company saw a sharp increase in commodity and fuel costs due to looming macroeconomic uncertainties. In addition to pushing up the cost of purchasing and delivering of merchandise, this also limited consumers' purchasing power. The company said it is keeping a close watch on its price-conscious customers' responses to the tough economy as well as competitive changes.

The company is launching its e-commerce website to cater to online shopping demands of existing customers and customers living outside its 35-state market area. I think this is an important move, as other retailers such as Dollar Tree (NAS: DLTR) and Wal-Mart (NYS: WMT) already have functional e-commerce websites. This move should increase the store's presence and convenience.

The Foolish bottom line
With a major fall in its debt and, subsequently, interest expenses, the company's books look better to me. Things are clicking at Dollar General, and the company raised its full-year outlook for same-store sales growth to 4%-6% and for total sales growth to 12%-14%. Dollar General is making lemonade out of a really difficult consumer economy.

At the time this article was published Navjot Kaur does not own any shares in the companies mentioned above.The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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