The two sides of Dollar General's post-recession growth

FORTUNE -- Dollar General was one of the few retail bright spots during the recession. Its success was a direct barometer of the economy: The worse Americans felt about their finances, the more they sought out the retailer's low-priced goods.

Now that consumers have a little more spring in their step, it would seem that Dollar General's fortunes would reverse. But the retailer, which will report earnings on Tuesday morning, is expected to show continued growth and a strong outlook. If Dollar General's role as an economic indicator holds true, consumers have moved into a more permanent state of frugality. And while that may be good news for Dollar General, it's bad news for the overall economy.

Americans are feeling better, at least in theory. The Conference Board, a New York-based consumer research company, said consumer confidence numbers have been climbing for three straight months, hitting 63.3 in May, the highest point since March 2008.

However, many Americans are still burdened with debt, underwater mortgages, and decimated retirement savings. Even if their confidence is on the rise, they are likely to continue hunting for bargains even as their post-recession purse strings loosen. Some Dollar General (DG, Fortune 500) shoppers will likely trade up to Target (TGT, Fortune 500), Wal-Mart (WMT, Fortune 500), and traditional grocery stores, but many who turned to the retailer in bad times will stay there, and possibly spend even more.

"The psychology of the consumer is different than after the 2001-2002 recession," says Northcoast Research analyst Nick Mitchell. "They've suffered severe shell shock, and they'll remain thrifty even as the economy recovers."

Analysts following Dollar General are predicting another stellar period of growth. The Goodlettsville, Tenn.-based retailer, which was taken private by Kohlberg Kravis & Roberts in July of 2007 and relisted on the NYSE in November of 2009, increased its profits by 200% and sales by 12.8% from 2008 to 2009. Its same-store sales have jumped more than 9% for each of the past two years. Since relisting, Dollar General's stock has climbed 115.6%.

Dollar General isn't just beating more expensive retailers -- it's leading the dollar store segment, too. While under KKR's ownership, the company was able to take advantage of cheap real estate opportunities, opening 500 stores in 2009. Dollar Tree (DLTR, Fortune 500) opened 240, and Family Dollar (FDO, Fortune 500) opened just 180 new stores in 2009.

While the pace of growth will likely slow this year, Dollar General will continue to expand its reach. In 2010, the company intends to open an additional 600 stores, and relocate or redesign an additional 500. Operating profits are forecasted to climb between 15% and 20% on a sales jump of 8% to 10% over 2009. Analysts expect Dollar's General's new stores will offset a slight decline in sales at existing stores.

Even with a 35% predicted increase in capital spending this year, analysts praise the retailer for its significant liquidity. At the end of 2009, Dollar General had $222 million of cash, and no outstanding borrowings. Wells Fargo analyst Grant Jordan predicts that the company will generate an additional $475 million of free cash flow and should finish 2010 with almost $700 million in cash.

Coming out of this recession, the dollar store segment will be better positioned to hold onto the consumers it gained during the downturn. The over--60 crowd makes up the most frequent dollar store shoppers, and that age bracket will soon be flooded with fixed income baby boomers.

Plenty of higher-end retailers won't be cheering Dollar General's good news on Tuesday. Indeed, May retail sales figures were a big disappointment on most levels -- among the few bright spots were other discounters, including Target, TJX (TJX, Fortune 500), BJ's Wholesale (BJ, Fortune 500) and Costco (COST, Fortune 500).

Americans may be feeling more confident, but that doesn't mean they're back.