Dollar General says not to abandon Family Dollar pursuit

(Reuters) - Dollar General Corp said it remained committed to acquiring rival Family Dollar Stores Inc , pointing to a prolonged battle for dominance of the deep discount retail sector in the United States.

Family Dollar last week rejected a $9 billion buyout offer from Dollar General, the No. 1 U.S. deep discount retailer, saying the deal could run foul of competition law and opted for a smaller bid from Dollar Tree .

Dollar General's chief executive, Rick Dreiling, played down antitrust concerns on Thursday and said the company's offer was both achievable and superior to Dollar Tree's offer.

"We continue to believe the potential antitrust issues are manageable ... The financial benefits of our offer to Family Dollar shareholders are indisputable," Dreiling said.

Dollar General also reported lower-than-expected second-quarter sales and cut the top end of its full-year comparable-store sales forecast on Thursday.

The slowdown in same-store sales in recent quarters and continued gross margin deterioration underscores the importance of consolidation in the dollar store space, Sterne Agee & Co analysts wrote in a note.

Dollar General's same-store sales growth slowed for the third straight quarter, while gross margins have failed to grow in the last six quarters.

The retailer has been struggling to shore up margins after it slashed prices to keep its lower-income shopper base from being lured by retail giants Wal-Mart Stores Inc and Target Corp as well as by Family Dollar and Dollar Tree.

Low and middle income consumers have also been cutting back on spending, leading to weak quarterly sales at several retailers.

Investment adviser Neev Capital's Rahul Sharma said Dreiling's comments suggested that Dollar General was not under any pressure to move immediately.

"They can afford to pay a lot more. It sounds like they don't want to say that just now," said Sharma, the managing director of the firm.

Dollar General's shares were up 1 percent $64.33 in early trading. Up to Wednesday's close, they had risen almost 11 percent since the company offered to buy Family Dollar.

BELOW EXPECTATIONS

The company also reported same-store sales growth of 2.1 percent for the quarter ended Aug. 1, below the 2.9 percent estimated by analysts polled by research firm Consensus Metrix.

"The volatility of the macroeconomic environment continues to pressure the consumer and impact the company's cost of purchasing and delivering merchandise," Dreiling said.

The company said it expects same store sales to grow 3.0-3.5 percent in the year ending January, down from its previous forecast of 3-4 percent.

Dollar General's gross margins shrank 53 basis points to 30.8 percent in the quarter, as it sold more lower-margin products such as tobacco and discounted more.

Dollar Tree also reported a lower-than-expected second-quarter profit last week as gross margins shrank by about 80 basis points to 34.2 percent.

Dollar General's quarterly net income rose 2.4 percent to $251.3 million, or 83 cents per share, matching the average analyst estimate.

Net sales rose 7.5 percent to $4.72 billion, falling short of the average analyst estimate of $4.77 billion, according to Thomson Reuters I/B/E/S.

(Editing by Savio D'Souza and Saumyadeb Chakrabarty)

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