Dollar General Shares Surrender

Dollar General Corp. DG shares are getting crushed in pre-market trading, down nearly 9% after the company missed earnings estimates by 2 cents this morning. The company reported quarterly earnings of 48 cents per share on $3.45 billion in revenues. Wall Street had been expecting earnings of 50 cents per share on $3.42 billion. The company maintained its yearly outlook for earnings and revenue guidance. For the fiscal year ending Feb. 3, 2012, Dollar General expects adjusted earnings of approximately $2.20 to $2.30 per share on revenues of $14.47-$14.73 billion. Wall Street is expecting earnings of $2.26 per share on $14.51 billion in revenues. The company said gross profit fell 63 basis points to 31.5%, as rising commodity costs cost $3.6 million during the quarter. The company was also affected by higher markdowns, mostly related to the reduction of winter home and apparel merchandise. The company also had a shift in sales to more consumable products which have a lower gross profit rate. “Dollar General is off to a great start in 2011,” said Rick Dreiling, chairman and chief executive officer. “Our first quarter sales exceeded our expectations with strong same-store sales growth of 5.4 percent. As I look back on the first quarter, we maintained our focus on serving our customers and worked to hold the line where we reasonably could when it came to raising prices in an environment of rising commodity and fuel costs. Our customers are depending on Dollar General more than ever for consistent value and convenience. “In spite of expected gross margin headwinds, we remain well positioned to deliver on our financial outlook for fiscal 2011 as we invest for the long-term health of the Company,” Dreiling said. Up until the quarterly miss, shares of Dollar General had been among the best performing stocks in consumer discretionary, as more consumers flock to dollar stores as opposed to places like Wal-Mart WMT for a variety of reasons. One quarterly miss is not enough to back off an investment thesis, particularly when investors like Bill Ackman and Nelson Peltz are in the space. The earnings call will be very important to listen to, as shares are getting crushed on the miss. A 2 cent miss leading to a 9% haircut seems like an overreaction here, but investors would be wise to dig deep into the report to see if it is warranted or not.