'A splash of cold water' for Dollar General, peers

The recent payroll tax increase has a number of retail players concerned about the spending of many consumers and has turned investor sentiment regarding deep discounters such as Dollar General downright gloomy. Bloomberg's Chris Burritt has made the rounds with a number of analysts who expect the coming year to be one of slowing sales and profit growth — although the Street still expects Dollar General to grow EPS 15 percent — because of pressure on the consumer and stronger competition from Wal-Mart Stores.

Family Dollar Chief Executive Officer Howard Levine is all too aware of how higher payroll taxes will affect shoppers.

“Our customers are clearly making choices,” he said on a Jan. 3 conference call. Higher payroll taxes “go against our customers’ wallet. Clearly they do not have as much for discretionary purchases than they did.”

That was one reason for the downgrade of both Family Dollar and Dollar General this week by RBC Capital Markets' Scott Ciccarelli, who now has Dollar General at 'sector perform' versus his previous 'outperform.' Ciccarelli's price target now stands at $49 from $54 — his Family Dollar one has come down to $63 from $67 — because he's concerned about an ominous list of factors that also includes price competition, a less profitable sales mix and lower government subsidies.

What remains to be seen is whether the 2013 script will read the same for both Dollar General and Family Dollar. Dollar General CEO Rick Dreiling and his team have made clear to investors that they will put market share over profits for the time being — something Levine, whose turnaround story trails that of Dollar General by several quarters, may not be able to do as easily. Still, that philosophy could cap the upside in Dollar General shares, which have slid 15 percent in the past three months (Ticker: DG) and are back where they were in March of last year.