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By Erik Kobayashi-Solomon | 01-28-2010 12:32 PM

Dollar General Stock May Lose a Few Cents

Shares of this discount retailer look pricey compared with peers, and customers may trade up as the economy recovers.

Erik Kobayashi-Solomon: Hi, I'm Erik Kobayashi-Solomon, co-editor of Morningstar OptionInvestor, and today it's my great pleasure to invite Zoe Tan, an analyst covering the retail sector, to talk about our position in Dollar General. Zoe, thanks for coming.

Zoe Tan: Thanks for having me.

Kobayashi-Solomon: Zoe, a couple weeks ago I wrote an in-depth piece about Dollar General taking a bearish position in it, and really just wanted to get some more color on this company.

One of the first things that I wonder about, a few years ago, Dollar General really came into problems because they overbuilt, they oversaturated their markets, and they were taken private by KKR.

Now, they've IPO'd, and it seems like they're building a lot of stores again, they're back up talking about 500 new stores this year. Are they in danger of oversaturating again?

Tan: That certainly is a concern given that they have more than 8,000 stores already and the fact that they have been closing stores, almost 600 stores over the past few years. We do think that that is a sign that they are oversaturated.

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