Big Bucks from Dollar Stores

By Jonathan Yates - August 1, 2012 | Tickers: COST, DG, DLTR, TGT, WMT | 0 Comments

• Email
• Print

While it would seem almost impossible to be profit from selling at prices lower than Wal-Mart (NYSE: WMT), Target (NYSE: TGT) or Costco Wholesale Corporation (NASDAQ: COST), both Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR) have succeeded.

Year to date, Dollar General is up by 23.94%.  On a quarterly basis, sales growth is up by 13.02%.  That tops the five year sales growth rate of 10.06%.  Earnings-per-share growth is rising by 38.32% on a quarter-by-quarter standard.  This results in a 5.40% profit margin for Dollar General.

Dollar Tree is up 25.02% for 2012.  It has a profit margin of 7.39%.  Contributing to this is sales growth rising on a quarterly basis by 11.49%, higher than the five-year average of 10.81%.  On a quarterly basis, earnings-per-share growth is up by 21.96% for Dollar Tree.

Although appreciable in size ($12 billion market cap for Dollar Tree and $16.95 billion for Dollar General), Wal-Mart, Target and Costco are much larger.  That allows for Dollar General and Dollar Tree to be more responsive to opportunities and thus more profitable.  Dollar General and Dollar Tree purchase items from hundreds of suppliers, keeping costs low and profits higher by going with only the best buys at any one time and catering to peak seasonal demands.  Costco, Wal-Mart and Target are Big Box retailers that try to cater to all needs in one trip.

While having everything under one roof is certainly more convenient for the shopper, it is less conducive to higher profits.  The profit margin for Wal-Mart is just 3.68%, about half that for Dollar Tree.  Target has a profit margin of 4.68%.  For Costco, the profit margin of 1.73% is about one-third that of Dollar General.

In addition to the profit margins, the return-on-equity for Dollar General and Dollar Tree is very bullish.  The average-return-on-equity is about 15%.  Dollar Tree has a superior return-on-equity of 33.93%; for Dollar General it is 18.68%. 

Also bullish is the high institutional ownership and low short float for each.  These investors are assiduously courted and have superior research resources to select only the best stocks.  Dollar General has an institutional ownership level of over 99% with a short float of only 2.57%.  A short float of 5% is considered to be troubling for a company.  For Dollar Tree, the level of institutional ownership is 45.28% and the short float is just 2.74%.

The 1.5% economic growth just registered by the United States for the second quarter of 2012 certainly puts Dollar General and Dollar Tree in position to profit from bargain-seeking consumers.  In addition, according to the Thompson Reuters/University of Michigan survey, consumer confidence is falling.  That translates into more business for the over 4,450 Dollar Tree stores across 48 states and in Canada.  Dollar General has more than 10,000 stores in 40 states that are closely located to distribution centers to minimize costs.  Each stock did very well during The Great Recession.

Now trading around $51 a share, close to its 52-week high of $56.04, the mean analyst target price for Dollar General is $58.50. FBR Capital just reiterated its Outperform rating for the company with a new target price of $61.  Every analyst rating this year for Dollar General has been positive.

Dollar Tree, having just split, is now about $52 a share, near its 52-week peak of $56.81, with the mean analyst target price for the next year being $53.58.  Dollar Tree was recommended by TheStreet as it is has limited exposure to the euro zone crisis and has stable earnings with strong growth prospects.

• Email
• Print
• Feedback