This Dollar Store is Growing Fast

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

Dollar stores are one of the fastest growing segments of the U.S. retail industry. If we include the top three players, they combine to have 21,311 stores, which is more than the store count of many leading U.S. brands.

Dollar General (NYSE: DG) recently opened its 10,000th store in Merced, CA, and is looking ahead with its aggressive store expansion strategy. It reported its first quarter results, and its total sales increased by 8.5% despite the tough weather and macro conditions. Its Phase 5 merchandising initiative and tobacco rollout across its stores is going to drive sales growth this year. Now, let’s discuss its initiatives for growth in detail.

Store expansion with new format stores will drive sales growth

Dollar General has indicated that it will increase its store base with 636 new stores and 550 store remodels and re-locations in the fiscal year 2013. These store openings and the remodeling process will lead to 7% increase in the selling space this fiscal year. It will open 50 more stores in California after the 50 stores expected to be opened by the end of last year.

It will also open 20 Dollar General Plus stores and 40 Dollar General Market stores this year. DG Plus stores are larger than traditional stores and will keep more coolers and freezers in stores. These stores will help it to keep more fresh products and meat in stock.

Phase 5 initiatives of merchandise assortment will drive comparable sales

Dollar General is offering a wide range of products including major national brands and some private label products of the company. In its Phase 5 merchandising initiative, it has focused on putting in the most productive planograms with the right SKU set.

It has increased inventory level in the high margin categories like health and beauty aids. It will add SKUs in under-penetrated categories like auto, hardware, laundry and apparel. It will expand its Phase 5 initiative to 4200 legacy stores, which are expected to drive comparable sales growth this year.

Tobacco rollout to all stores will drive comparable sales

It has tested tobacco in Nevada and Florida markets and results are positive with 33% more sales than expected. In the tested markets, comparable sales have increased by almost 100 basis points due to tobacco addition. It has plans to make tobacco available at all its stores by the end of the second quarter.

Tobacco rollout will be followed by beer and wine in the stores. These products are low margin products but still they will drive same store sales growth in the future.

Peer analysis

In the Dollar stores category, the other two players that are behind Dollar General are Dollar Tree (NASDAQ: DLTR) and Family Dollar Stores (NYSE: FDO).

Dollar Tree is also expanding its store base this year with 340 new stores and 75 store relocations in the US and Canada. It will rollout Master Card across the chain in this fiscal year, and it will have a positive impact on the Dollar Tree Direct sales.

Its new Deal$ concept and merchandising initiative with 40% extra impulsive buying items are expected to drive sales growth. It has taken off the $1 restriction, and it will help it to offer more products in value offerings.

Family Dollar Stores is expanding its store base under its Fee Development Program, where new stores will be opened with better financing options. In this program, it will develop stores and sell or lease it to others.

The company has strong expansion plans, and 450-500 stores are expected to open in this fiscal year. Its gross margin has declined by 146 basis points in the second quarter. This downfall was due to the weak performance of discretionary categories like Home and Apparel. It is expanding its private labels, and focusing on more direct sourcing to enhance margins in the future.

 

P/S ratio

Op. Margin

1Yr. Fwd. P/E

Dollar General

0.97

9.33%

13.59

Dollar Tree

1.52

11.61%

15.55

Family Dollar Store

0.66

7.50%

14.84

Source: Google Finance and Yahoo! Finance

Dollar General has reported operating margin of 9.33% and the lowest one-year forward P/E ratio of 13.59 among the three mentioned peers. Dollar Tree has the highest operating margin of 11.61%, but with a P/S ratio of 1.52. Family Dollar Store has the lowest P/S ratio of 0.66 and moderate forward P/E of 14.84 among peers.

Conclusion

Dollar General is the biggest dollar chain in the U.S. and is still expanding its store base to achieve sales growth. Its new format stores, DG Plus and DG Market stores, with more coolers and freezers will drive sales with more fresh products in stock. Its merchandising initiative with new planograms on SKUs along with the tobacco rollout across stores is expected to drive its sales growth. So, I recommend a Buy for long-term growth.

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Ash Sharma 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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