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Contributors: Douglas McIntyre Jon C. Ogg

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Monday, August 21, 2006

Dollar Store Woes, Maybe More Than Just Dollar General

Stock Tickers: DG, DLTR, FDO, NDN

After Friday's close Dollar General (DG) came clean and issued a profit warning by saying that EPS would now be in a range of $0.14-$0.15 per share, which is below the Company's previous guidance of $0.18-$0.22 per share provided in June.

Dollar General's gross margin for the second fiscal quarter of 2006 is below expectations as the impact of adding more national brand items to the consumables mix was more negative than planned. Additionally, the gross margin has been negatively impacted by the mix of sales which has been more heavily skewed toward lower margin highly consumables than anticipated. Back to school sales were also below expectations.

Dollar General (DG) is down 10.5% premarket, down $1.49 at $12.60 on last look. Its ending P/E Friday was 13.55 and it commended at $4.3 Billion market cap. The old 52-week trading band was $13.02 to $19.84, so this will be a new year low for the dollar store. Here is how this ranks with comparables:

Family Dollar (FDO) $3.7B; 20.3 P/E; $24.63 Friday close and $19.40 to $27.95 52-week trading range.

Dollar Tree (DLTR) $3.1B; 17.7P/E; $29.38 Friday close and $20.56 to $29.87 52-week trading range.

99 Cent Only (NDN) $807M; $11.60 Friday close and 52-week trading range $8.61 to $13.88. P/E skewed b/c restructuring and filing delays.

These "dollar stores" are perhaps the first victim of economic issues when the wholesale market is still hanging in there with high costs. It squeezes their margins on the back-end and their retail clients are the first ones impacted by any economic slowdown. Rising energy costs and wholesale pricing power have definitely impacted the ability of the company to keep a lid on cost of goods sold. By and large these stores are the least pleasant of the entire retail sector, equal to or barring convenience stores that are mom and pop shops that get sold to each new first generation family.

So with Dollar General as the king of the sector having the lowest "old" multiples and with it trading at a 52-week low, are the others just slower to react or is the street over-reacting to what they were already trying to price in?

Either way, it is still fun asking how much each item costs at the dollar store.

Jon C. Ogg
August 21, 2006

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