More Dollars for Dollar Stores

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

Dollar stores have had an impressive run up in the last five years, with their stock prices multiplying 2x to 5x. Although 2012 wasn't a very good year for these companies, I believe they can provide substantial returns in the longer term given their high exposure to lower-income consumers. In this article I analyze three dollar stores, weighing their expansion plans in the upcoming year with the expectation that these stocks maintain a growth of ~15% in the upcoming year.  

Dollar Tree (NASDAQ: DLTR) is continuously expanding its variety of frozen products. In 2012, the company added freezers and coolers to 325 more stores to offer a broader selection of food items, and is planning to raise that number to 400 in 2013. Also, to enhance its market share in the industry, Dollar Tree  is expanding geographically. It is planning to build a distribution center in Windsor, CT in 2013. The center will be spread out in a one million square foot area and will serve the company's stores across Connecticut, New York, New Hampshire, Vermont, Maine, Massachusetts, and Rhode Island. This will provide an opportunity for the company to further expand into the higher volume markets in the north east.

The company will also benefit from improved margins, as this center will help it reduce costs with better supply management. Dollar Tree is also on track with its planned initiatives for its growth in Canada. In the beginning of 2012, the company had planned to increase its store base by ~25% in Canada and a total of 18 stores have been opened YTD. However, looking at the huge potential in the Canadian market, the company is expected to exceed this plan by ~12 additional stores. The long-term plan of the company remains to have up to 1000 Dollar Tree Stores in Canada, along with the 7000 stores in the US.

Along similar lines, Dollar General (NYSE: DG) is also planning to expand its store base by 625 additional stores in 2013. Most recently, the company posted its 3Q12 results with its total sales up by ~10% year over year to ~$3.96 billion. To sustain its profitable position in the industry, the company is planning various initiatives to increase its store traffic. It recently announced its decision to launch tobacco products in its ~10,000 stores by 2013. This move by the company is aimed at countering Family Dollar store’s move to include tobacco products in its stores by the end of the year. Dollar General also decided to introduce beer and wine in around 60% of its locations. These inclusions of tobacco and beer will definitely help the company drive more traffic to its stores, and will also result in improved comp sales.

Family Dollar Stores (NYSE: FDO) operates around 7400 stores across 45 states in the US. 2012 was a year of great progress for the company, driven by its strong performance in the seasonal, consumables, and electronic segments. Due to the company's continuous focus on cost efficiency and customer satisfaction, it was able to succeed even during the economic downturn. To capture a bigger share in the dollar-store market, Family Dollar is planning to expand its store base by 500 new stores in 2013. It will also renovate and relocate around 850 of its existing stores to further improve its performance. This will help the company to enter new markets across the country, and it expects to continue this expansion at a rate of ~7% over the next 3-5 years. Another initiative which helped the company in the last year was improved food assortment in all its stores. I expect the company to continue with this strategy, along with more private label offerings to improve its sales and margins.

Summing up, I think all three stocks have the potential to monetize during the upcoming year. With expanded unit growth and focus on in-store experiences, these stocks should see an upside.

ShwetaDubey 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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