UPDATE 3-Dollar General comp sales growth slows

* Q2 EPS ex-items $0.42 vs Wall St view $0.38

* Q2 same-store sales up 5.1 pct

* Sees FY EPS $1.68-$1.74 vs Street View $1.72

* Sees FY same store-sales up 4 pct-6 pct

* Shares down 0.6 pct
(Rewrites first paragraph, adds details on comparable sales,
updates stock price, changes dateline from NEW YORK)

By Brad Dorfman

CHICAGO, Aug 31 (BestGrowthStock) – Dollar General Corp (DG.N: ),
which sells most of its merchandise below $10, posted slower
growth in quarterly comparable store sales, raising concerns
that its business was also vulnerable to the weak economy.

The chain had benefited as lower-income consumers shifted
away from pricier stores, and even from discounters like
Wal-Mart Stores Inc (WMT.N: ), to save more money on basic goods
like food.

But it faced sweeping discounts by Wal-Mart during the
quarter as the world’s largest retailer emphasized its
low-price message. Low-income customers have also cut back
nonessential spending further as unemployment remains high and
concerns mount over a double-dip recession.

“This has been one of the toughest competitive environments
I can remember,” Chief Executive Rick Dreiling said during a
conference call with analysts.

Concerns over sales growth offset a margin-driven beat in
quarterly earnings.

Dollar General’s sales at stores open at least a year rose
5.1 percent, exceeding results from many retailers. But that
fell short of what some analysts had expected and was down from
the 6.7 percent increase seen in the first quarter.

Sanford Bernstein analyst Colin McGranahan said investors
could be focused on the same-store sales numbers “given overall
concerns around the weakening consumer environment and Dollar
General’s ability to drive strong sales as it laps the
beginning of its new merchandising initiatives.”

In recent years, the company increased advertising
circulars and expanded store hours to help boost sales.

Dreiling said that Dollar General’s sales momentum
continued to build as the quarter progressed and said he was
“encouraged” with the current quarter’s sales thus far.

The retailer said it saw the number of shoppers and average
transaction amounts rise during the second quarter, which
included July, when consumer sentiment hit a nine-month low.

PROFIT BEATS

The company said profit was $141.2 million, or 41 cents a
share, in the second quarter ended July 30, up 50.9 percent
from $93.6 million, or 29 cents a share, a year earlier.

Excluding one-time items, Dollar General reported a profit
of 42 cents per share, beating analysts’ average forecast of 38
cents, according to Thomson Reuters I/B/E/S.

Inventory also rose 12 percent, exceeding the pace of sales
growth. The company said inventory rose to support store
growth, new merchandise initiatives and overall sales
increases.

Dollar General stood by its previously announced plan to
open 600 new stores and remodel or relocate another 500 in
2010. It expects capital expenditures to reach $350 million for
the year. Dollar General operates about 9,100 stores.

The company also raised its adjusted full-year 2010
earnings forecast to a range of $1.68 to $1.74 per share, with
the high end of the range above Wall Street estimates of $1.72
per share. The company had previously said it expected a
profit between $1.62 to $1.69 per share.

Dollar General expects same-store sales, or sales at stores
open at least a year, to be up by between 4 and 6 percent.

Sales rose 11 percent to $3.21 billion, in line with
analyst estimates.

The retailer, which is majority-owned by private equity
firm Kohlberg Kravis Roberts & Co [KKR.UL], benefited from
efficiencies in how it sources the items it sells, helping lift
gross profit margins by about 1 percentage point to 32.2
percent.

Dollar General shares were down 16 cents or 0.6 percent at
$27.22 on the New York Stock Exchange at midday.
(Additional reporting by Phil Wahba; Editing by Michele
Gershberg, Derek Caney and Matthew Lewis)

UPDATE 3-Dollar General comp sales growth slows