There's no denying that with today's updated outlook, Dollar General Corp. (NYSE:DG) has disappointed some investors. The question is, has the stock already priced in that worst case scenario? To really come to a conclusion, we have to compare it to peers like Family Dollar Stores, Inc. (NYSE:FDO), Dollar Tree, Inc. (NASDAQ:DLTR), and Big Lots, Inc. (NYSE:BIG). First things first though.
The big deal is, Dollar General won't be generating the expected earnings of $1.671 billion in 2012. Rather, DG will be more apt to produce income somewhere between $1.63 billion and $1.645 billion... about 2% less than first expected, and about 9.8% higher than last year's EBIT profit. Big Lots' bottom line is expected to shrink 3%, Family Dollar Stores is growing income at a pace of 16.7% annually, and Dollar Tree is currently growing its bottom line at a pace of 23.7%.
Though not tops in the category, Dollar General Corp. is still growing income respectably; same-store sales are apt to roll in between 3% and 4% for the year. That's a tad less than its peers, but not drastically weaker.
So where does DG differ to the point of deserving a 19% pullback since July? The answer may lie in its valuation. Given the new expected per-share earnings figure of between $2.78 and $2.81, that means Dollar General is currently priced at 16.30 times its forward-looking earnings. DLTR trades at 14.0 times its projected future income, BIG is trading at a forward-looking P/E of 9.1, and FDO is priced at 14.6 times its expected 2013 income.
In other words, you could buy a more expensive stock than Dollar General Corp., but it would be tough to do within the discount and dollar store space. In fact, it wouldn't be easy to do outside the discount space; the market's average forward-looking P/E right now is right around 14.0.
Bottom line? Though Dollar General topped its estimates for last quarter, the stock had no wiggle room whatsoever. Now with the company reeling in its full-year outlook, that frothy price is coming back to haunt it. The better alternative is Dollar Tree, Inc., which is presently in a strong downtrend, but exhibiting stronger growth than nay of its peers, and not costing too much to tap into that growth. Granted, it takes some guts to try and catch a falling knife like DLTR, but it's much closer to a bottom than DG or any of the other names in the space right now following its 33% pullback since June.