Dollar General caution sends shares to 9-month low

Competitors heat up discount action as consumer spending gets more erratic, 'tight-fisted'

Shares of Dollar General fell more than 7 percent Tuesday to their lowest level since March after the discount retail giant's top executives said they see "growing near-term pressures that are impacting [...] customers’ confidence and spending, and a challenging competitive environment."

Shares of Goodlettsville-based Dollar General (Ticker: DG) ended trading Tuesday at $42.94, down 7.8 percent on the day. Volume was very heavy, with more than 28 million shares trading versus a daily average of about 6.2 million.

The stock price drop came despite a third-quarter earnings report that beat analysts' estimates of 60 cents per share by two cents. Net income jumped 21 percent from the fall of 2011 to $208 million while revenues rose 10 percent to almost $4 billion. Gross margins for the quarter were down slightly to 30.9 percent while same-store sales rose 4 percent.

But those numbers were overshadowed by a cautious outlook for the company's fiscal fourth quarter. On his team's conference call with analysts and investors, Chairman, President and CEO Rick Dreiling said Dollar General's core customer is growing increasingly "tight-fisted" and concerned about the broader economic environment and that spending has become much more erratic from week to week. Dreiling said the market is showing "vacillation like I've never seen before."

"We've coined the phrase here that there are more days than there are dollars for the customer," he said.

That has led some competitors to grow more aggressive with advertising, coupons and even outright price cuts. Given Dollar General's focus on growing sales — even if it means sacrificing some profitability in the short term — that's not something the company will let pass.

"We have made the decision in Q4 to protect unit growth and we intend to respond to that," Dreiling said, adding that such efforts will focus on categories like coffee and cereals.