How to Trade Dollar General Ahead of Its Earnings Report

By Andrew Keene  SEP 04, 2012 2:35 PM

A noted options trader shares pre-earnings trade strategies.


MINYANVILLE ORIGINAL Dollar General (DG) is a discount retailer in the US with almost 1,000 stores in just under 40 states. The company offers consumer merchandise, consumables, seasonal products, home products, and apparel. Tomorrow, September 5, at 9:00 a.m. CT / 10:00 am ET, DG will report its financial results for second quarter and fiscal year 2012 earnings. Estimates for this quarter are $0.64. The report is following a record-breaking first quarter in sales, operating profit, and net income.

Last quarter, same-store sales increased 6.7% and total sales increased 13%. Net income was up 36% and the company raised its full year 2012 financial outlook, up 8% to 9%. Last year, DG opened more than 600 stores and closed only 60. This year, DG is planning to open around 600 new stores, with total floor space square footage to increase by 7%. 67% of capital expenditures are expected to be used for store growth and development alone.

DG opened today at 51.32 and was down 1.16% by midday, trading in less than a two point range for the day. The 52-week low and high are 34.22 and 56.04 with the high being reached in early July. The stock has risen steadily since last September, with the one-year low in early September 2011. The growth of the stock can be seen in the changes in moving averages. The 200-day moving average is sitting at 46.28 while the 50-day moving average is at 52.24, almost a six point difference. The stock is lower on possible concerns of falling sales and higher costs on regular customers.

My Trade:
Trade:  Selling the DG September 50-52.5 Call Spread for $1.00
Risk: $150 per 1 lot
Reward: $100 per 1 lot
Notes:  I would want to be a seller on any rally, and my breakeven is $51, which is up 1.5%.  I make money if the stock is down, flat, or up less than 1.5%.
No positions in stocks mentioned.