Can Dollar Stores Pull Off a Holiday Repeat?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Dollar stores made a killing last holiday season.

In the fourth quarter of last year, Dollar Tree (Nasdaq: DLTR  ) and Dollar General (NYSE: DG  ) reported scorching comparable sales increases of 7.3%  and 6.5%, respectively. Dollar Tree boosted its profit over those winter months too, by a strong 13%. And Dollar General rang up a nearly 20% jump in its own profit.

That showing compared favorably to that of other national retailers. Wal-Mart (NYSE: WMT  ) had a 1.5% sales increase over the same period, which it pulled from a much larger base. And Target's (NYSE: TGT  ) comparable sales increase of 2.2% didn't come close, either. Dollar Tree's and Dollar General's stocks were rewarded for this fantastic growth with increases of 60% and 38%, respectively, in 2011.

So the one-dollar question this holiday season is: Will it be deja vu all over again for these discounters? I think so, and here's why.

Of Christmases past
The catalyst for last year's big boost in dollar-store sales can be boiled down to one word: refrigerators.

Value shoppers were drawn into dollar stores last year as they looked to trade down from more expensive retailers and to do more discount shopping for everyday consumables. To capitalize on that trend, Dollar Tree added freezers and coolers to 380 of its stores in 2011 so that it could offer a wider selection of food. Dollar General followed the same strategy, and opened more of its "market" style stores while expanding cooler capacity to 500 of its traditional stores last year.

The companies invested major capital on the upgrades, and also risked lower profit margins by encouraging sales in the relatively less profitable consumables business. But the gambles paid off in spades. By promoting lots of repeat visits, the expanded store layouts boosted guest traffic numbers and helped average guest spending climb too.

So consumables helped turn these dollar stores into more frequent shopping destinations, without sacrificing profitability. Talk about win-win.

This time around
But can these retailers refrigerate their way to record profits again this year? Both discounters are banking on the trend to consumables continuing apace. Dollar Tree plans to add freezers and coolers to 325 more stores in 2012, nearly the same amount as last year. And Dollar General is in the middle of a similar push to continue boosting consumables capacity.

Even more encouraging to dollar stores, though, is the fact that the shopping buzzword for this holiday season appears to be "practicality." Consumers are feeling more confident, but are still very value-conscious in this economy. According to a recent NPD survey, many plan on spending more this holiday season, but they report discount stores and off-price retailers as increasingly their destination of choice.

As we saw last year, that's a favorable environment for dollar stores to operate in. And these retailers are ready to capture whatever seasonal boost they can. Earlier this month, for example, executive VP Todd Vasos at Dollar General said, "Getting a jump-start on the holidays is important to our customers, so we've filled our stores with seasonal items in October to help them prepare for decorating, giving and celebrating."

It's not all tailwinds for dollar stores, though. Higher gas prices and tough comparisons to last year's results make for a challenging second half of the year. Still, given the trends in consumables and holiday spending, it seems likely that sales increases will continue, despite the tough comparisons to last year's record results.

Now what?
They may be set for another great business year, but how do the dollar stores look as investments? With P/E ratios of around 18, both Dollar Tree and Dollar General look a tad expensive relative to Wal-Mart and Target -- which can be bought for around 15 times trailing earnings. But given the growth these discounters have been booking, that premium seems warranted.

And even though their stocks have trounced the S&P since 2008, more recently they have underperformed their larger competitors:

WMT data by YCharts.

Of this group, I think Dollar Tree would make the best investment right now. As the only discounter that focuses exclusively on the $1 price point, the company has a simple and compelling value proposition. With increasing consumables and holiday spending, it also boasts a clear path to continued growth for this winter, and beyond. And best of all, shares are well off their 52-week highs thanks to what looks like short-term worries to me. The company had a great holiday season last year and looks set to put on a repeat performance in 2012.

If you're looking for some other long-term investing ideas, let me invite you to read the Fool's brand-new special report: "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so just click here and get your copy today.

Fool contributor Demitri Kalogeropoulos has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Wal-Mart Stores. 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.

Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2082708, ~/Articles/ArticleHandler.aspx, 10/25/2016 3:22:14 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 6 hours ago Sponsored by:
DOW 18,223.03 77.32 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.83 52.43 1.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/24/2016 4:02 PM
DG $68.27 Up +0.34 +0.50%
Dollar General CAPS Rating: ***
DLTR $75.97 Up +0.26 +0.34%
Dollar Tree Stores CAPS Rating: ***
TGT $68.26 Up +0.03 +0.04%
Target CAPS Rating: ***
WMT $69.19 Up +0.85 +1.24%
Wal-Mart Stores CAPS Rating: ***