Are Dollar Stores Shooting Higher?

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

Dollar Tree (NASDAQ: DLTR) with its 4,000 stores is poised to go higher after a pullback from its 52 week high of $56.82. Why? Because consumables (food and beverages) comprise more than half of their revenues and Dollar Tree has quietly added one more arrow to their quiver. They are now accepting manufacturer’s coupons.

Big deal, you may think to yourself. The truth is coupons drive sales. Just ask any major food or personal product corporation, say Kellogg’s, Procter & Gamble, Unilever, or Campbell’s Soup Company.

As annoying as it may be to find yourself behind some ‘extreme’ couponer in the grocery line you might be surprised by a 2010 Nielsen Company report called “The Coupon Comeback” that found more affluent households of $70,000 in income and higher were dominant drivers in coupon use. Further, it was households with incomes of $100,000 that led the growth in 2009 being the second highest year ever of coupon use.

The Nielsen report also found that coupon users actually shop more often and buy more at a 1.8 rate greater than the average shopper. Yes, the richer you are the more you hate to waste money. And yes, the more affluent and educated are more likely to obtain coupons online with internet redemption growing 263% in 2009.

It summarizes, “Once on their way to extinction coupons made a strong resurgence in 2009. While they offer consumers a chance to stretch their dollars further, they also offer real growth opportunities for retailers and manufacturers.” (Italics mine)

In 2009 redemption growth at dollar stores was 71% compared to the nearest retailer segment, mass merchandisers at 26%. Now that Dollar Tree has implemented this new policy since August 26 it should be able to compete with its larger competitors on a more level playing field.

Dollar Tree’s P/E is 21.63 and its PEG is 1.15. It is up 25.32% over 52 weeks and next reports on November 15.

Why Not Buy Dollar General

Dollar General (NYSE: DG) is the biggest of the dollar stores with 10,203 stores in 40 states. Its P/E is 20.28 and its PEG is 1.01.

Recently, I had a chance to visit Dollar General while taking my daughter to college. As usual, there was one thing we forgot on our list of “stuff”. So we went to Dollar General. It was located close to campus in a depressing strip mall (I’m not sure it even qualified as a strip mall) flanked by a laundromat, a thrift shop, and a cheap mattress showroom. Inside it was cluttered but empty of shoppers even on a day when students were moving back in their dorms en masse. The prices were comparable to Wal-Mart or Target. Needless to say I was not impressed.

I don’t really understand the widespread Wall Street enthusiasm for Dollar General. It has a much higher proportion of debt than Dollar Tree (although Dollar General was able to renegotiate terms on their debt saving them millions.) Comparing net income of the three dollar store chains including Family Dollar Stores (NYSE: FDO) at more than twice the size of Dollar Tree Dollar General has net income of $891.3 billion while Dollar Tree outperforms larger competitor Family Dollar with net income of $527.70 million to Family Dollar’s $421.16 million.  

Dollar General reported better-than-expected earnings in August with EPS growth at 33%, specifically citing an uptick in consumables sales. The stock is up 42.77% over 52 weeks. However, capital expenditure at Dollar General is 58.6% of operational cash compared to 38% spending on capital expenditures at Dollar Tree.

Is Family Dollar a Bargain

While Family Dollar looks like a bargain with a yield of 1.30% and a P/E of 18.07 it, too, holds a higher proportion of debt to cash than Dollar Tree. The PEG is 1.25. The company operates 7200 stores in 45 states. The stores are located in lower-rent suburban and urban areas. The last time I visited a Family Dollar it was more disheveled than before.

The stock has underperformed the other two and the S&P 500, only up 16.96% over 52 weeks. It reports again on October 3. To be fair, Family Dollar is a dividend champion having raised dividends for 36 years.

Of the three I would pick Dollar Tree with more room for upside, a catalyst for consumables sales just implemented, lower proportion of debt and capital expenditure spending, and a better shopping experience for higher income shoppers. Dollar Tree is now able to shoot higher than its competitors with cleaner and more strategically sited stores to attract more affluent shoppers that still love to pinch every penny.

 

 

 


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