Dollar Store Dreams Won't Come True

Nobody loves a well-reasoned trade more than I do. Sometimes, though, what seems like obvious logic ends up yielding disappointing results.

Ultra-bargain-store stocks have enjoyed a year-long rally. Stores like 99 Cents Only Stores (NYSE: NDN  ) , Dollar Tree (Nasdaq: DLTR  ) , Family Dollar Stores (NYSE: FDO  ) , and even bargain giant Wal-Mart (NYSE: WMT  ) have cashed in on the trend. Look at their returns over the past year:

Company

1-Year Return

99 Cents Only Stores

41%

Dollar Tree

53.8%

Family Dollar Stores

35.9%

Wal-Mart

16.9%

S&P 500

(39.1%)

Source: Yahoo! Finance.

Not bad, huh?

You know the purported reasoning behind the picks: The average consumer is strapped and looking to stretch their shopping dollar. But have these companies actually earned their rallies with better results, or did assumptions override reality?

Are earnings following suit?
The question I was curious about was whether these companies were actually benefiting from the struggling economy. Everybody loves a low price, but it's not like a six-pack of tube socks and a 99-cent picture frame suddenly become must-have items just because money is tight.

To check, I looked at how each company's net income over the past 12 months compared to its earnings from the previous year. Here's what I found:

Company

Year-Over-Year Earnings Growth

99 Cents Only Stores (NDN)

(198%)*

Dollar Tree (DLTR)

7%

Family Dollar Stores (FDO)

(4%)

Wal-Mart (WMT)

9%

Source: Capital IQ, a division of Standard and Poor's. *Reflects loss of $5.8 million versus profit of $5.7 million in year-ago period.

So much for the stellar growth I hoped to see. At least on the bottom line, none of these companies have really proven to be growth stars during the darkness of a recession. They're not exactly disasters -- except for 99 Cents Only Stores -- but I don't think their results justify the huge jumps in their stock prices.

Sure, you can argue they were all undervalued a year ago. But given how much attention they've gotten lately, it's more likely that they're overvalued now. Once the market finally figures out these companies aren't backing up their stocks' gains with a boosted bottom line, investors may want to get a refund on their shares in a hurry.

For more on recession investing, read:

Wal-Mart is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor James Brumley doesn't own any of the companies mentioned above, though he does buy his tube socks in six-packs. James and all the rest of the Fools abide by the Motley Fool's disclosure rules.


Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 16, 2008, at 4:24 PM, Bartlesby wrote:

    This is a smart thought process, but do you really believe that the past 12 months earnings can answer your question right now? If today's date was 12/16/2009, we would have a much better idea if these discounters actually benefited from the crisis. The trailing 12 months EPS of these companies only captures the beginning of the crisis. The next 6 months will be much more telling for these companies.

  • Report this Comment On December 17, 2008, at 10:10 AM, dachuyn wrote:

    Well, I decided to take profit. This article makes me nervous. I am afraid more stores are selling 99c items (Target, Alberson, Walmart, etc). Competition will be tought, and I think DLTR has gained enough.

  • Report this Comment On December 18, 2008, at 2:46 AM, KevinUW wrote:

    The US dollar is losing value, so as long as Dollar Tree can drive demands to offset higher commodities and import prices, it will be ok. Or Dollar Tree needs to figure out way to raise prices (e.g. selling things for more than $1).

    You should buy these names as well as retails with exposure to international markets like MCD and YUM would do better with weaker US $.

  • Report this Comment On December 18, 2008, at 11:36 PM, simplea wrote:

    I shop dollar tree. It's unique among similars. Clean, well stocked, orderly, unusually helpful staff, extremely competitive on 1000s of necessary household items, partyware, canned and packaged staple foods, and it goes on. This is only discount chain I shop -- others don't compare for quality and even good design. The buyers are like Target buyers -- have educated good taste. Remarkable. I see more middle class shoppers each month discovering Dollar Tree. Think they are undiscovered to date.

  • Report this Comment On December 20, 2008, at 12:42 PM, dachuyn wrote:

    I would wait until the stock drops down below $36 to buy again. Too many insider (sales) transactions at this price. There have been more insider sales (especially by the CEO) this month than any other month when DLTR hit 52-week high. Look at the insider transactions, it seems to me that DLTR should be valued around $37-$38 (when insiders started to sale, but not at the volume we see now this December).

    http://finance.yahoo.com/q/it?s=DLTR

  • Report this Comment On December 30, 2008, at 2:59 AM, Classof1 wrote:

    Of course, when crude oil topped $147, the dime stores were whacked as transportation costs and fuel surcharges soared along with the costs of everything else they sell. Going forward, many of these adverse conditions have largely eased, or went away altogether. We should be able to see better margins, lower operating costs, and enhanced profitability. I wouldn't dare buy NDN going into earnings, and I hate it when insiders are unloading (DLTR), but FDO is looking good!

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