This Dollar Store Continues to Shine

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

The dollar stores in the United States are in great shape. Cash-strapped consumers continue to pinch pennies. A combination of the payroll tax hike and the ongoing sequester have only served to broaden the customer base for the nation’s biggest dollar stores, and incoming earnings reports are confirming this trend.

The market was treated to a solid third-quarter report from industry heavyweight Family Dollar Stores (NYSE: FDO), and in return, sent the stock up more than 7% on the day of the announcement. Here’s why there’s still room to run for Family Dollar, as well as the rest of the dollar store chains.

The downtrodden consumer is a dollar store’s best friend

Consumers are undeniably scaling down their shopping, opting for dollar stores instead of higher-status peers. To illustrate, Family Dollar revealed that its net sales increased 9% during the third quarter, with same store sales (which measures only sales at locations open at least one year) rising nearly 3% year over year.

This was mainly due to the ongoing roll-out of new items at Family Dollar, which are growing strongly and should bring more customers through the doors going forward. In total, sales in the company’s Consumables category, which includes food, health and beauty aids, and tobacco, rose 14.8% during the quarter.

Moreover, the company gave a very positive outlook on the rest of the year. Fourth quarter diluted earnings per share are expected to rise between 19% and 26% year over year. For the full year, diluted EPS is expected to clock in between $3.77 per share and $3.82 per share, compared to $3.58 in fiscal 2012.

Family Dollar isn’t the only dollar store executing admirably throughout 2013. Dollar Tree (NASDAQ: DLTR) and Dollar General (NYSE: DG) also rose strongly on the day of Family Dollar’s earnings results, a sign of broad industry optimism.

Both Dollar Tree and Dollar General have seen great results in recent quarters. In its most recent fiscal year, Dollar Tree reported same-store and net sales increases of 3.4% and 11.5%, respectively. These results flowed through to the bottom line, as diluted earnings per share of $2.68 soared 33% from the year prior.

Then, in May, Dollar Tree reported record first-quarter results. Net sales increased 8.3% to a record $1.87 billion, with diluted EPS rising 18% from the year-ago period.

Meanwhile, Dollar General had a fantastic year itself, reporting record sales, operating profit, and net income for fiscal 2012. The good times kept rolling in the first quarter, with adjusted EPS rising 13% on the back of 8.5% growth in net sales.

Although Family Dollar is the only stock of the three that pays a dividend, both Dollar Tree and Dollar General are deeply committed to providing shareholders with meaningful returns, and have demonstrated that commitment with strong share buybacks.

Dollar Tree repurchased 1.5 million of its own shares during the first quarter, and still has nearly $800 million left on its existing share repurchase authorization.

Year to date, Dollar General has repurchased approximately $220 million of its common stock, with approximately $424 million remaining in its existing program.

There’s still plenty of room to grow

I first wrote about the three major dollar stores in January, with a particular emphasis on Family Dollar. I was extremely fond of the stock then, as it had been stuck in a downtrend even though its recent earnings reports were very positive. At the time, Family Dollar exchanged hands for $58 per share, which I felt was an absurdly low valuation for a growing company.

Back in January, I had a positive view on not just Family Dollar, but Dollar General and Family Dollar. Quite simply, the continuing struggles of the American consumer were a huge tailwind for the dollar stores coming in to the year, and I believe those same conditions will exist for the foreseeable future. I maintain a positive view of all three stocks today, and wouldn’t be shy about committing capital to these names, even after such impressive rallies.

I continue to favor Family Dollar out of the group, for its more shareholder-friendly policies. Earlier this year, Family Dollar increased its dividend by more than 23%, which represented the 37th annual dividend increase for the company. This is in addition to the newly authorized $300 million share buyback program. While each dollar store is worthy of investment, I continue to advise my fellow Foolish investors to favor Family Dollar, and consider adding it to your portfolio.

Robert Ciura 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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