You Can't Go Wrong Owning These Southern Retailers

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The southern part of the U.S. is known for its general stores and has been the starting point of many successful retail businesses. The South has a tradition of retailing that appeals to all corners of the U.S., and now globally. The scope of these retailers spans from discount stores to mass merchants. In identifying worthwhile investments, it's important for investors to look at a company's tradition and culture. What has worked in the past will likely work in the future.

The low price leader

Fred's (NASDAQ: FRED) considers itself to be the low cost price leader. Its discount retail stores and full-service pharmacies are located predominantly in the Southeastern portion of the U.S. Fred's operates approximately 700 discount general merchandise stores. The strategy is to combine the best elements of a discount dollar store, drug store, and mass merchant.

Each store stocks more than 12,000 frequently purchased items that include nationally recognized brand name products, proprietary Fred's label products, and lower-priced, off-brand products. Fred's has a distribution center in Tennessee and one in Georgia.

In the first quarter of this year, total sales increased 0.2% to $501.5 million. Net income increased 9.1% to $11.4 million. Gross margin increased to 30.1% compared to 29.5% in the same quarter last year. In May, total sales increased 0.2%, while comparable store sales decreased 0.5%. June was a much better month for Fred's with total sales increasing 3% and comparable store sales increasing 4.5%.

Going forward, Fred's expects earnings for the full year to be $0.77 to $0.88 per share. This compares to $0.84 per share last year. However, last year saw a $0.12 per share increase due to a one-time benefit. Without that benefit, earnings last year were $0.72 per share.

The focus at Fred's is on improving its existing store base. Fred's is undergoing a reconfiguration plan that improves each store's layout, lighting, shelving, aisle widths, and signage. Fred's is also working to get more of its pharmacies into its stores. Currently, only about half of the stores have a pharmacy. The ones that do consistently exceed the company's operating profit goal of 4%.

Fred's also plans to continue rolling out its hometown auto and hardware expansion. Sales have increased 15% for automotive and 43% for hardware in the stores where this expansion was implemented. Currently, 175 stores have seen this expansion and by the end of the year, that number is expected to grow to 325 stores.

Save time and money every day

Dollar General (NYSE: DG) considers itself to be the nation's largest small-box discount retailer. Its strategy is to make shopping for everyday needs simpler and hassle-free by offering an assortment of the most popular items at low everyday prices in small, convenient locations. The company operates approximately 10,662 stores in 40 states.

In the first quarter of this year, total sales increased 8.5% and same-store sales rose 2.6%. Same-store sales increased on the back of increased customer traffic and a higher average transaction amount. Earnings per share rose 13%.

Going forward, Dollar General expects total sales to increase 10% to 11% compared to last year. Same-store sales are expected to increase 4% to 5%. For the full year, the company expects to earn $3.15 to $3.22 per share compared to $2.89 per share last year.

The reason for this optimism is continued growth. Dollar General plans to open approximately 635 new stores this year, and remodel or relocate approximately 550 stores. Remodeling stores is a positive as that tends to increase sales. Overall, square footage is expected to increase by 7%. More selling space equates to more sales.

This Southern retailer is now a global giant

Wal-Mart Stores (NYSE: WMT) has its roots in Bentonville, Arkansas, where the company was founded and where its headquarters are today. Today, the retailer is the largest in the world. The company now has approximately 10,800 stores under 69 banners in 27 countries, and e-commerce sites in 10 countries.

In the first quarter, Wal-Mart's earnings grew 4.6% to $1.14 per share. Consolidated net sales increased 1% to $113.4 billion. Operating income rose 1.1% to $6.5 billion. Comparable store sales decreased 1.2% in the U.S. due to a colder, wetter winter and a delay in consumers getting their tax refund checks.

Besides international expansion, the growth for Wal-Mart going forward is in e-commerce sales. E-commerce sales grew 30% in the first quarter and that segment looks to be a big driver going forward. Wal-Mart is working to increase its capacity to ship online orders from each store.

Currently, Wal-Mart has a test program in place at 35 stores where online orders are shipped straight to customers' home. A successful rollout of this program would be a game changer in the online realm and would be a major blow to Amazon.

Wal-Mart continues to reward shareholders. In the first quarter alone, Wal-Mart returned $1.6 billion to shareholders in dividends and repurchased 30 million shares at a cost of $2.2 billion. The company has $1.5 billion remaining under its previous $15 billion share buyback program. With the dividend payout ratio at only 33% and free cash flow of $10 billion, look for the dividend to increase and more share buybacks in the future.

Foolish assessment

I like all three retailers. Fred's has enormous room to grow. It has a great retail model and as it expands its pharmacies into more stores, comparable store sales are going to increase. Dollar General is remodeling its stores as well, and its smaller footprint gets it into more markets. Lastly, what can I say, you can't go wrong owning Wal-Mart. The company remains the best in retail and has the track record and management team to back it up. These Southern retailers are worthy of a place in your portfolio.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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