A Dollar Goes A Long Way, Generally Speaking

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

Note: A previous version of this article stated erroneously stated Dollar Tree doesn't offer frozen or refrigerated items. The statement has been corrected below.

It has been said for years now that a dollar just does not buy you that much any more. This is probably because people are just shopping at the wrong places. If you walk into a Target or Wal-Mart, chances are you won't find much quality for one dollar. However, if you were to drop by a Dollar General (NYSE: DG), you could buy almost anything within the store. 

Dollar stores have been growing at an accelerated rate over the past few years. This could be due to consumers becoming smarter with their money, the increase in the number of Americans on food stamps, or because more and more people are finding great deals and high quality products that they never knew existed. Regardless, the growth has continued and the companies in this sector are gaining strength.

Dollar stores have generic lines of products, such as Dollar General’s Clover Valley, but what most people do not know is that they also carry brand names from manufacturers like Procter & Gamble, Kimberly Clark, Kellogg’s, Unilever, and numerous others. The generic lines are what you will find for $1, while the others are "pricier" at around $1.80 to $2.50. These prices are still cheaper than you will find at a supermarket. All of the generic products contain almost identical ingredient lists and a similar name. 

Dollar General currently operates 10,000 stores in 40 states, with a large concentration in the Southeast. They have recently begun the expansion west and have an untouched market in the Northwest. This gives them plenty of room for further expansion. The map below shows their current stores. On top of the expansion, Dollar General now offers online shopping and has been adding stores with refrigerated sections to hold fresh meats, frozen foods, produce, and other grocery products. I believe this is the future of dollar stores--the more they become a one-stop-shop for consumers to stock up on products, the better. On a side note, Dollar General was added to the S&P 500 after the market close on Nov. 30, 2012.

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Dollar General is the largest of the dollar stores, followed by Dollar Tree (NASDAQ: DLTR) and Family Dollar (NYSE: FDO). Dollar Tree operates 4,451 stores in 48 states and 5 Canadian provinces. The store count is steadily rising, and should reach 6,000 in a few years. Dollar Tree is one of the only remaining stores that offers everything inside for $1. Many others have added products for a little over a dollar to several dollars, but this is not the concept they are going for; when they say it’s a dollar store, they mean it. Dollar Tree has also ramped up its website for online shopping, but they only offer items on a per-case basis. This will often deter shoppers. Additioanally, Dollar Tree has only added refrigerated sections to some of their stores, so they may currently miss out on the potential of that expansion.

Family Dollar currently operates 7,400 stores in 45 states. They are expanding steadily, including 58 stores having their grand openings in November and December of 2012 alone. Family Dollar has been adding stores with refrigerated grocery space, like Dollar General. Also, like Dollar General and Dollar Tree, Family Dollar has been expanding their online presence to attract computer savvy deal seekers. Family Dollar has the right plan for continued success. 

Over the last 6 months, Dollar General is down about 12%, Dollar Tree is down a whopping 26%, and Family Dollar is down about 16%. During this same time frame the S&P 500 is up a little over 7.5%. These companies are underperforming because of reports that 2013 would not be as big of a year as analysts had originally estimated. Dollar General is trading at just 16.7 times current earnings and 14 times forward earnings. Dollar Tree is trading at 16.25 times current earnings and 14.3 times forward earnings. Finally, Family Dollar is trading at just 16 times earnings and 12.8 times forward earnings. All of these multiples are very low when you consider the size of the discount store space. Both Dollar General and Dollar Tree currently do not pay out dividends, while Family Dollar pays out a respectable 1.50%. I believe the other two could initiate dividends in the next year or two, while Family Dollar continues to grow their yield.

Dollar General, Dollar Tree, and Family Dollar are all very cheap at their current levels. Any of these have the potential to be top performers for 2013, especially since they have been beaten down over the last few months. Dollar General is my favorite stock in this sector, followed by Dollar Tree in second and Family Dollar coming in at third. I am initiating an outperform calls on CAPS for all three. These stocks are BUYS. 

JoeySolitro1 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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