Which is the Best Discount Retailers?

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

Family Dollar Stores (NYSE: FDO) has faced a significant drop of nearly 13% after its first quarter earnings announcement. Since December, the share price has decreased continuously from $71 per share to $58.50 per share. Some people believed that when the economy got better, consumers would trade out of the discount channel. That apparently had negative impacts on discount retailers. Zacks also downgraded Family Dollar Stores from “outperform” to “underperform.”  Should investors stay away, or consider the share price decline as an investment opportunity?

What happened?

Family Dollar Stores has just released its 2013 first quarter earnings results. The revenue growth was quite decent, but the earnings fell short of Wall Street’s expectation. The net sales were more than $2.4 billion, a 12.7% growth compared to the same period last year. The revenue of $2.42 billion was higher than the analysts’ expectation of just $2.38 billion. The net income was nearly $80.3 million, somewhat lower than the $80.35 million of Q1 2012. The EPS of the first quarter was $0.69, much lower than analysts’ expectation of $0.74.

Positive Signs of Fundamental Growth

With a closer look, Family Dollar Stores’ business fundamentals are still growing. The consumables category has experienced the strongest sales growth of 18.5%, due to the strong growth in tobacco, health and beauty aids, and food items. Because of the increasing traffic and average customer transaction value, its comparable store sales in the first quarter rose by 6.6%. The December comparable store sales have also increased by 2.5%, and was also driven by the consumables category.

Howard Levine, the company’s Chairman and CEO, has commented that the company had been driving more traffic to the stores and increasing its market share. Firmly believing in the long-term business fundamentals, he said:

While the near-term economic environment remains difficult to predict, I continue to be excited about the long-term opportunity for our business. We are seeing tangible benefits from our margin-enhancing investments in global sourcing and private brands, and as we work to drive further benefit from the investments we are making to expand profitability, I remain confident that our efforts will deliver stronger results as we progress through fiscal 2013 and beyond.” 

The comparable store sales are expected to grow by 4%-6% in fiscal year 2013, with 500 new stores opening and 70-90 stores closing. The company estimated to spend $600 - $650 million opening new stores, renovating existing stores, and expanding supply chains.

Peers Comparison

Compared to Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR), Family Dollar is the smallest company, with $6.8 billion in market capitalization, while Dollar General and Dollar Tree are worth $15.4 billion and $9.33 billion, respectively. Among the three, Dollar Tree was the most profitable with 32.8% ROIC and 12% operating margin over the last twelve months. Dollar General had 11.17% ROIC and 10% operating margin, while the ROIC and operating margin of Family Dollar were 21.2% and 7%, respectively. In terms of valuation, Family Dollar is valued the cheapest among the three, with 8.07x EV/EBITDA. At the same time, Dollar General is valued at 9.45x EV/EBITDA, while the EV multiple of Dollar Tree is 9.08x EV/EBITDA

Foolish Bottom Line

Among the three, Dollar Tree stands out with the highest returns and the most profitable operations. Its net margin and return on invested capital were far superior to those of its peers. From the perspective of an investor, I would prefer Dollar Tree for its more impressive business performance.  

hoangquocanh 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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