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Dollar store channel was one of the few bright spots in retail during the recession. Dollar stores became an instant hit among Americans burdened with debt, underwater mortgages, and decimated retirement savings. Interestingly, contrary to the notion that dollar stores will have a reversal of fortune once the economy improves, they are still enjoying strong consumer demand. As a result, the shares of major dollar stores, including Dollar General (NYSE: DG), Dollar Tree (NASDAQ: DLTR), and Family Dollar (NYSE: FDO), have soared nearly twofold over the last 3 years.
In my opinion, one of the key outcomes of the recession is the increased consumer tendency to shrink their overall spending and attain some sort of predictability in uncertain times by hunting aggressively for bargains. Although we tend to think of dollar stores as popular among low and mid income households, post recession even the wealthier sections are viewing dollar stores as the smart choice for their basic needs. All of this explains the continued success of dollar stores post recession. Dollar General, Dollar Tree and Family Dollar combined have a notable 1.5% share of the retail market today, as compared to just 0.5% in 2000, and I remain optimistic about the success of dollar stores going forward, as the combination of value and convenience provided by the dollar stores remains a highly compelling proposition for U.S. Here’s a look at these stocks in detail.
Dollar General is the industry leader with more than 10,000 stores in the U.S. The company still has significant unit growth opportunities, and management is confident that a 7% annual unit growth rate is sustainable. I see huge scope for unit growth in California, where the company still has a very limited presence with a total unit base of just over 50. The management has done a tremendous job in terms of merchandise assortment, store environment, and store standardization over the last five years, resulting in an increased appeal to customers. The company is trading at a forward PE of 13.17 and looks attractively priced with a PEG ratio of just 0.87.
Family Dollar operates over 7,500 locations nationwide. The retailer is aggressively expanding its store count and opened 475 stores and renovated, expanded, or relocated 854 stores during fiscal 2012. Family Dollar is also projected to grow its unit count by 7% annually over the next 3-5 years. Through fiscal 2013, the company has plans to renovate, expand, or relocate 850 stores and is expected to cross the 8,000 mark by the year end. I like the company’s strategy of keeping the up-keep and renovation costs to a minimum so that they have an option of relocating the store as the leases expire. Although the company missed the EPS forecast in its recent quarter, I am not overly bothered, as the company posted a strong same store sales growth of 6.6% with a phenomenal 18.5% growth in consumables category, which shows the strength of the company’s fundamental business. An annual dividend yield of 1.5% is an added bonus.
Dollar Tree operates more than 4,600 discount variety stores in 48 US states and 5 Canadian Provinces. The company has been a consistent performer over the last decade and has managed to increase its EPS every year over the past 10 years. Dollar Tree has the “best-in-class” operating and profit margins in the dollar store sector. Moreover, the proposed $104 million distribution center in Windsor will facilitate better supply management and further boost margins. The company has been aggressively repurchasing its shares, resulting in a 32% reduction in share count. I expect this trend to continue as the company has a very low debt (totally debt of ~$260 million, debt/equity of just 0.17) and no preferred shares. The stock is trading at a discount to its historical average and seems attractively priced with a PEG ratio of just 0.88.
To conclude, dollar stores are a growing force in the retail industry. All these companies exhibit recession proof characteristic and seem to be blossoming post recession due to an apparent shift in shopping habits. These retailers have a strong unit growth potential over a long run and their efforts towards enhancing the in-store experience should further attract more customers. In my opinion, dollar stores are here to stay and expand, and I see good long term investment opportunities in these stocks.
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