Did Dollar General Shoot Itself in the Foot?

Despite posting record third-quarter sales and earnings figures, shares of discount retailer Dollar General Corporation (NYSE:DG) closed down over 7 percent on Tuesday. The company’s strong third-quarter performance was offset by its dismal outlook for the fourth quarter.

How Good Were the Earnings?

Third-quarter same-store sales grew a solid 4.0 percent, followed by a 10.3 percent increase in total sales. The company is rapidly growing its presence and opened 479 stores in the first 39 weeks of 2012.

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Operating profit grew 16 percent, and now sits at 9.1 percent of sales. Adjusted earnings per share grew 26 percent year over year to $0.63 per diluted share. Full-year 2012 EPS outlook was revised to a range of $2.82 to $2.85.

How Bad is the Outlook?

Dollar General issued these cautious comments with its earnings release: “We are facing a significant same-store sales comparison from our 2011 fourth quarter, which included very strong January sales, growing near-term pressures that are impacting our customers’ confidence and spending, and a challenging competitive environment.”

The company will share its full-year 2013 financial outlook in March, when it reports fourth-quarter results. Until then, investors don’t seem willing to give the discount-retail industry the benefit of the doubt…

The Flash Crash breeds uncertainty.Not only have shares of Dollar General tumbled, but shares of Family Dollar Stores (NYSE:FDO) have also dropped, closing down 8.36 percent on Tuesday.

Shares of Dollar Tree (NASDAQ:DLTR) also fell as much as 4.4 percent in the afternoon.

CHEAT SHEET Analysis: Paddling Upstream

“I think the customer is fatigued, they’re tired, they’re scared,” said Dollar General chairman and CEO on a conference call. Reuters reports that the company is seeing a more prominent paycheck cycle, where it generates more sales immediately after shoppers receive paychecks, and slumps in between. This is an indication that economic headwinds are taxing consumers who are increasingly living paycheck-to-paycheck.

One of the core components of our CHEAT SHEET investing framework explains that companies riding macro trends tend to outperform those that don’t. In this case, discount retailers previously riding high because of the poor economy are now struggling against it.

The holiday season also isn’t entirely good news for the discount retailers. If consumers are strapped for cash, then they are more likely to blow their holiday budgets on the highly competitive discounts being offered on big-ticket items. The stock price seems to be readying itself for a less-than-spectacular end of the year.

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