Another Day, Another Dollar Store

AnnaLisa 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) reported Q1 2013 earnings on January 3 and the stock sold off big time from $64 to $55 a share on lowered guidance and missing on EPS estimates. Two things in particular were worthy of mention, especially this quote from the release, "The holiday selling season proved to be more challenging than we expected as customers faced increasing financial uncertainty."

If their lower and middle-income customers aren't spending at dollar stores in an uncertain economy where the heck are they spending? At the low end of the retail barbell, one would expect them to spend more at dollar stores when budgets are tight unless the economy is in such a slump that their customers are going off the grid and making their own soap. I find the quote Troubling with a capital T.

A New Dollar Store Every Day

This worry is only bolstered by rising inventories, shrinking margins, and a decrease in net income for the quarter from the year ago period. While Family Dollar is more of a bargain since it sold off with a 15.82 P/E and a 1.30% yield it's been buying back shares at higher prices. Most Troubling, again with a capital T, is it's expanding at a rate slightly higher than one dollar store a day as it said on its earnings release, 500 new store openings and 70-90 store closings for 2013. This would take it close to 8,000 stores in the U.S. It also said their rise in cap ex spending of $66.4 million in the quarter was due to 125 new store openings in 2012.

With a debt load of $547.52 million to $98.60 million in total cash, paying down debt might be a more prudent use of monies. Expansion, normally a good thing, also means more expenditures on labor, promotion, real estate costs, etc. Share repurchases are still expected as the Board has authorized $120.8 million available for buybacks. Shareholders would probably prefer dividend increases although Family Dollar is already a Dividend Aristocrat.

A Fire Sale on Dollar Stores

The dollar stores had been on fire these last few years, but now seem to be part of a fire sale with Family Dollar only up 3.93% in 52 weeks (including the recent sell-off). Dollar General (NYSE: DG) the big name in the dollar space with over 10,000 stores, is only up 3.57% over 52 weeks. Smallest rival Dollar Tree (NASDAQ: DLTR) with 4,632 stores, is actually the worst performer of the three down 4.37% over the last year while the S&P 500 advanced 14.21%. And Dollar Tree is the name with the least debt to cash and the highest return on equity at 38.76%.

Sentiment on these names has turned downright nasty as the Street tosses dollar stores out of its shopping cart, this despite anticipated earnings growth in the high teens for all three names.

Dollar General reported on Dec. 11, including record Q3 operating profits up 16%, but also made a Troubling statement in its earnings forecast that, "The volatility of the macroeconomic environment continues to pressure the consumer and impact the Company’s cost of purchasing and delivering merchandise to its stores." This is even worse than the Family Dollar quote as not only aren't their customers shopping as much, but it's costing them more.

Dollar General, too, has decided to expand with another 635 stores and their Pennsylvania distribution center should be up and running this year. Dollar General has a 16.25 P/E. Dollar General has been the darling of the dollars in what was a hot sector, but its debt to cash is worse than Family Dollar with $3.03 billion in debt to total cash of $146.63 million. Yet, not only is it expanding but it also is buying back shares.

Dollar Tree, where everything is a dollar or less, seems to have been punished the worst yet it is adding more refrigerated and frozen stock to its stores and trades at a 15.92 P/E and is much closer to a 52 week low than its high of $57. Since its November 15 Q3 earnings release the stock has just barely been treading water under $40 for a 30% decline.

However, Dollar Tree has gained favor with Lone Pine Capital and Ray Dalio, famed founder of Bridgewater Associates, with his recent buy in this name to make it and Dollar General two of the most popular retail names for hedge funds in late 2012.

Dollar Tree is expanding also, 111 new stores in 2012 alone, but in this case it doesn't bother me so much as it really has much more room to expand as the smallest dollar chain. It also doesn't have a huge debt burden that needs to be addressed before expansion.

One quote from the earnings release was encouraging in support of Dollar Tree expansion  in which CEO Bob Sasser said,"I am particularly pleased with the performance of our new stores which have opened at historically higher levels of productivity."

Wait For Another Day?

The same store sales growth of past years is slowing slightly for these names, but a longer term favorable trend still seems to be in place. While the dollar stores appear to be in a race against each other to saturate the US and to see who can repurchase the most shares, I would rather hold Dollar Tree as it has been punished the most while having the best return on equity and the least percentage of debt. As market sentiment is still fairly negative after the Family Dollar report, a contrarian play might emerge if these names sell off further.



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