Dollar General Drops as Profit Trails Analysts’ Estimates

Dollar General Corp. fell the most since it first sold shares to the public in 2009 after posting first-quarter profit that missed analysts’ estimates, hurt by rising gasoline prices and clearance sales.

Net income in the period ended April 29 rose to $157 million, or 45 cents a share, the Goodlettsville, Tennessee-based company said today in a statement. Analysts had projected 50 cents, the average of estimates compiled by Bloomberg.

Dollar General, led by Chief Executive Officer Rick Dreiling, said higher transportation costs, as well as price cuts on winter home goods and apparel, squeezed profit. Retail gasoline prices have climbed 23 percent this year, prompting some customers to pare budgets.

“Gross margins were the source of the miss,” Colin McGranahan, an analyst at Sanford C. Bernstein & Co. in New York, wrote today in a note to clients. McGranahan, who has an “outperform” rating on the shares, said the company is managing expenses well.

Gross margin, the percentage of sales left after the cost of goods sold, shrank by 63 basis points to 31.5 percent in the quarter, according to the statement. McGranahan had projected the margin to expand by 5 points. A basis point is the equivalent of 0.01 percentage point.

Dollar General projected no expansion in gross margin in the fiscal year through January 2012, Dreiling said on a conference call today, after the company had predicted an improvement in March.

Raising Prices

In the quarter, the retailer refrained from increasing prices on some products including coffee even as costs rose, hurting margins, Dreiling said on the call. Raising prices to cover all cost increases would have hurt sales among consumers pinched by unemployment and gas prices, he said.

“A dollar item going to $1.15 is a major change for our customer,” he said. They will “tell you that you moved the price of olives by 5 cents. They are very price sensitive.”

Dollar General declined $3.26, or 9.3 percent, to $31.81 at 4 p.m. in New York Stock Exchange composite trading, the biggest drop since Nov. 13, 2009. The shares have gained 3.7 percent this year.

The company also reiterated its full-year earnings forecast for as much as $2.30 a share.

Dollar General said it plans to open 625 new stores and to remodel or relocate 550 locations this year, at a cost of up to $600 million.

Sales at stores open at least 13 months increased by 5.4 percent. That’s down from a gain of 6.7 percent in the same period a year ago. Total revenue advanced 11 percent to $3.45 billion.

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