Three Dollar Stores to Look For

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

In the last few years, Dollar Stores in the US have shown good growth giving huge competition to the traditional retail giants. Even during the recession, these stocks proved to be a safe bet for the investors and posted better than expected last quarter earnings. With the recovering US economy these companies are broadening their product lines at moderate prices to beat the competition. Let's discuss these stocks in detail.

Dollar General Corporation (NYSE: DG): Dollar General is a long-term opportunity for the investors, taking into consideration its value message and its unit growth. The discount chain posted respectable 3Q12 where sales increased ~10% y/y to ~$3.96 billion. The company has bumped up its inventory per store by 32% in the last five years by launching new merchandising initiatives. This resulted in ~37% higher sales per store and the inventory has increased ~4% in last five years. But the company remains cautious over increasing competition and decided to rollout tobacco and cigarettes in the majority of its US stores at the end of 2Q13. Though there is a risk attached with this initiative as there has been a structural decline in this category and is considered to be of low margin. But this initiative is focused more towards driving the consumer traffic rather than increasing the profits. Under this initiative, the company tested the product in Nevada in 2011 and in 2012 added it in Florida to see the sales impact. The results came out positive as the company found that the average purchase per customer was ~$14 where tobacco was sold as compared to ~$11 where tobacco was not sold. I expect, this addition of tobacco could boost EPS to ~$0.05 to ~$0.10. Other than this, the company is well positioned and it is anticipated that a sharp pricing strategy will accelerate the consumable comps to ~7% from ~5%.

Dollar Tree, Inc. (NASDAQ: DLTR): The company reported 3Q12 results where it saw a 7.8% increase in net sales to ~$1.72 billion as compared to ~$1.06 billion a year ago. But the comparable store sale came at ~1.6% which was below the consensus estimation of ~2.5%. The company has shown a remarkable annual average earnings growth of ~16.2% in last ten years. Dollar Tree has a great potential for future growth as among the mid and large cap retailers it offers a good top line growth and has a unique fixed price concept with lower prices than any other retail channel. To attract the customers and drive in maximum traffic the company made efforts like increasing the private labels and brands and by adding refrigerated and frozen food. Also, the company's square footage remains its key growth driver as currently it operates more than ~4600 stores. Dollar Tree recently announced that it will be investing ~$25 million in order to expand its distribution centre in Marietta, Oklahoma by adding ~4,00,000 square feet which is ~603,000 square feet at present bringing the total to one million square feet. At present this facility supplies products to the company’s stores across eleven states including Oklahoma, New Mexico, Texas and Kansas. This expansion will help in handling the retailer’s growing sales in West and Midwest and will further enable the company to expand its reach and give value to its customers across the region. I think the company will grow its square footage by ~7% in the years to come and we can expect it to generate $2.24 billion of revenue in its 4Q12.

Family Dollar Stores Inc. (NYSE: FDO): The company reported its 1Q13 earnings with its net sales up by 12.7% to $2.42 billion y/y, beating the consensus estimate of $2.38 billion. The comparable store sales increased 6.6% which was primarily driven by consumables. But Family Dollar was not able to meet the consensus EPS estimate of $0.75 and reported EPS of $0.69. In order to survive amongst the big competitors such as Walmart and Dollar General, Family Dollar started selling cigarettes and tobacco products, magazines, gift cards and other high merchandise. Though these additions carry lower margin but they helped in increasing customer traffic inside the store. The company is making efforts to make itself a one stop shop for the low income group by increasing its private label offerings and further increasing its square footage. In last two years it has increased its grocery and household items in order to make a competitive pressure over its competitor Walmart and Target. Its commitment towards better price management, efficient inventory management and increased operating hours would result in incremental sales.

To sum up, I remain confident about all the three Dollar Stores for long term investment. Dollar General with an expected 7% increase in comp sale also gained attention due to its free cash flow which has increased to $580 million over the past four years and is highest since 2008. Dollar Tree’s average earnings growth of ~16% is expected to increase in future. On the other hand Family Dollar with its improved merchandising and store operations expects a 14% growth in its net sales in 2013.

madhudube 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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