Investors and Consumers Like These Discount Retailers

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The U.S. economy is reviving. GDP has increased by 2.7%, higher than the expected rate of 2.0%. Consumer spending has improved, and holiday shopping has further boosted sales.Even in a good economy, a consumer tries to find products at a cheaper rate, even if they're necessities. Dollar General (NYSE: DG) provides daily low prices in everyday products, which is why it remains a priority choice for consumers going out shopping.

What do the Numbers Say?

Dollar General unveiled its recent third quarter earnings on Dec. 11, with sales improving by 10.3% to $3.96 billion, and same-store sales growing by 4%. The revenue has been consistently growing in double-digits over the last four quarters, which shows sustainability in the company’s performance, as revenues are hard to manipulate.

The company has a current ratio of 1.65, which has improved over the quarters. This means that the company has improved its ability to pay off its creditors and other short-term debts. Good liquidity also means that the company has good cash surplus to pay dividends to its share-holders. Year to date the company repurchased $596 million worth of shares, which also helped increase EPS.

Is the growth real?

The company seems to be growing and doing really well as far as the numbers are concerned. Furthermore, the company is looking forward to adding 625 more stores that seem to be a real expansion plan. However, the concern is the additional cost arising because of expansion. The square footage devoted to sales is expected to increase by 7%, which will shrink its margins. The customers at discount stores are generally those with economic concerns and limited budgets and would shop at any place where they get things cheaper. In the long-run the investment in store additions might be a boon for investors, but as for now it can be a good reason of concern too.

Is there scope of growth for Wal-Mart?

Investors might feel Wal-Mart (NYSE: WMT) is a bit too big already with not much scope of growth, but still there is potential on both the domestic and international levels. Wal-Mart, with its pricing prowess, can take away market share from its competitors in the domestic market, making it a serious threat to Dollar General. The company is also looking to expand in Africa, Mexico, and India. The growth in the company and its stock prices has been consistent, and despite all negative news about Wal-Mart, it remains a good play for long term investors who are keeping growth prospects in mind.

About Another Dollar Store

Dollar Tree (NASDAQ: DLTR) saw growth in revenues in its last reported earnings. The good part is that despite opening more locations it has been able to control costs and provide better margins, but market penetration still seems to be a concern. The economy seems to be reviving and consumer confidence and spending seems to be improving; Dollar Tree, being a low priced retailer, should get some benefit out of it. The stock is priced at just 16 times its trailing EPS and seems to be of good value, despite major growth in its profits. More advantageously, this is a low beta (0.2) stock; this means the downside potential is also minimal, making it lucrative for investors.

Foolish Finale

The discount store industry as a whole gives me a positive vibe. Wal-Mart is a stock that can help gives proper diversification to your portfolio. Dollar General has potential, but it is necessary for its growth strategy to fall into place. I would hold on Dollar General, as I am bullish about this stock, but at the same time I do not feel it's trading cheaply enough at its current prices for further investments.

snehladha has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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