The Sector that Should Benefit your Portfolio

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

I like shopping at places where I get all I want under the same roof; and if it’s at a discount, my like turns into love. The phenomenon I am talking about is the same reason why discount retailer Family Dollar Stores (NYSE: FDO) saw larger net income and revenue in the fourth quarter. Increased customer footfall in search of better bargains, more variety of products, and newer stores helped the company achieve better results this quarter.

Present and Prospects

Revenue and net income at Family Dollar have soared in four straight quarters. In the company’s fiscal year that just ended on Aug. 31 it displayed a growth in revenue and net income by 9.2% and 8.7%, respectively, while comparable store sales increased 4.7%. In spite of tough economic conditions and competition in retail business, the company has done very well and produced a 16.1% increase in sales of consumables like food and beauty products.

The company has expanded its merchandise selection, increasing its customer relevance by offering, for the first time, tobacco products, magazines, and gift cards. Huge capital investments of up to $650 million have been planned for the fiscal year 2013, up from the $603.3 million Family Dollar spent in 2012 to strengthen its growth prospect. The retailer plans to open 475 new stores, including 41 stores in California, as well as renovate, relocate, and expand 854 existing stores. To further support its growth initiative it has opened another distribution centre, and its 11th distribution centre is under construction.

Family Dollar Stores is looking forward to enhance its shopping experience by offering newer products and increasing inventory productivity; that’s why the company expects double digit growth in EPS. It has ample store growth opportunity and products which can enhance its operating margins. Growing dividends, coupled with a good payout ratio, would add further value to the company. I would recommend buying this stock.

Looking Around

Wal-Mart (NYSE: WMT) is a name that everybody has heard of in the retail sector. It enjoys a huge price advantage over its competitors (though they are catching up) in the food-at-home industry. The plans of further cost reductions in Selling, General & Administrative expense will be passed to consumers and add to their savings. The company has also been promoting e-commerce, which should be well received by consumers and add more value to its stock.

Recently, Wal-mart saw its workers go on strike for the first time on grounds of poor working conditions, mistreatment by management, and low pay (or at times no pay). The walkout might be a temporary disruption, but its potential impact can be huge. Further investors were expecting increased payouts or share buyback rather than increased Capex. The company is a safe bet for investors, but it does not have any near term catalysts to add further value to it.

Dollar Tree (NASDAQ: DLTR) operates discount variety stores in the United States and Canada, offering merchandise at the fixed price of $1.00. The company's strengths are its revenue growth, impressive track record of EPS, growth in net income, and good cash flow from core business operations. The company’s net sales have grown due to new store openings and remodeling programs, as well as wise mergers and acquisitions.

In the last five years, net sales have increased at 10.4% CAGR and future sales growth is also expected from newer stores and store expansion and relocation program. In a recent filing the company declared that it sold off its ownership interest in discount retailer Ollie's Holdings, which should boost its third-quarter profitability by $0.16 to $0.17 a share. Stocks of Dollar Tree will serve your portfolio well if you are looking for a little diversification.

tarunbachhawat 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.If you have questions about this post or the Fool’s blog network, click here for information.

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