March 25, 2013 7:34 pm

Dollar General: when shopping lists

Retailer’s customers could be crimped by delays in tax refunds

Higher US payroll taxes and how they will affect retailers is a vexing question for investors this year. Take Dollar General, one of a few “dollar stores” that offer a hodgepodge of low-priced items, everything from packaged food to razors to clothing. On the one hand, there are fears that low income households will be the hardest hit from higher taxes, hurting sales at places such as Dollar General. On the other, most of their sales are from consumables and the company stands to benefit from the prospect of consumers with lower take-home pay “trading down”. A third factor is the improving US economy, which could cause some shoppers to trade up instead.

On Monday, Dollar General reported a 3 per cent increase in same-store sales in the three months ended February 1, at the low end of in-house guidance for a 3 to 4 per cent increase. But Dollar General was able to preserve margins, in spite of some concerns late last year about heightened competition and net profit beat analysts’ forecasts.

The company expects sales and profit growth in 2013, but warned that they will be stronger in the second half of the year, partly due to the rollout of cigarettes in its stores – a bid to boost traffic. It faces a tough first-quarter comparison – same-store sales rose 6.7 per cent a year ago. Cold spring temperatures versus last year’s warm weather also are not helping. And, in addition to payroll tax changes, Dollar General’s customers could be crimped by delays in tax refunds this year. Just ask Walmart.

The uncertainty helps to explain the stock’s performance on Monday: a range of up 6 per cent to down 0.5 per cent. At 16 times forward earnings, it trades in line with its historic multiple. Dollar General is opening new stores, but investors had still better believe that higher taxes are neutral or will lure more dollar shoppers.

Email the Lex team in confidence at lex@ft.com

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