Which Dollar Store Is Best for Your Wallet -- and Portfolio -- This Holiday Season?

Morgan Stanley predicts the 2013 holiday season will be the toughest one since 2008, with same-store sales expected to rise just 1.6% year over year. This doesn't make for a good reading for retailers, for whom the December quarter is very important. Many retailers have been seeing worrisome trends heading into the holiday season, as reported by Reuters.  

In addition, consumer confidence has dropped to a two-year low in November, according to the Thomson Reuters/University of Michigan preliminary Consumer Sentiment Index. Under such circumstances, shoppers would be looking to save as much money as possible this holiday season. This is why discount retailers such as Dollar General (NYSE: DG  ) , Dollar Tree (NASDAQ: DLTR  ) , and Family Dollar (NYSE: FDO  ) might see more footfall than usual as they offer merchandise for cheap.

Dollar General -- The best bet
In fact, Dollar General could be one of the biggest beneficiaries, as it is among the least expensive places to shop, as revealed by a Kantar Retail survey. The survey "determines how select retailers meet the grocery and consumable needs of shoppers looking for the lowest shelf prices to fulfill their basket requirements." Dollar General led the pack with a basket price of $28.70, slightly ahead of Wal-Mart's $28.82.

One can expect shoppers to rush to their nearest Dollar General store to take advantage of the low prices -- and there are plenty of them, with more than 11,000 stores in operation. On the other hand, it won't be surprising if investors are also tempted to shop for some Dollar General stock, as the company has been seeing solid growth in sales.

Dollar General is already up almost 40% this year and might make further gains. In the previous quarter, Dollar General's same-store sales increased 5.1%, well ahead of Dollar Tree's 3.7% jump and Family Dollar's flat performance. In fact, Dollar General's revenue grew in double-digits in the previous quarter, which is pretty impressive.

Dollar General has benefited due to store expansion and sales-driving strategies such as selling tobacco and consumable items. Higher sales of lower-margin items have been hurting its margin, but Dollar General expects to clock higher average ticket sales and gain market share in consumables. The company's aggressive store opening plan of 650 stores this year is more ambitious than its peers' and it is also redesigning its stores for better same-store sales performance. 

Dollar General has been aggressively installing coolers at its stores to push sales of consumables. It also noted that two-thirds of customers bundle their tobacco purchase with one or more items, which is good news as this should lead to a higher basket size. Dollar General is relatively cheap for investors as well, and so, it might make for a good investment this holiday season.

Family Dollar -- Mixed emotions
Discount retailer Family Dollar was third on the list, just behind Wal-Mart, with an average basket price of $30.81. That's a difference of almost 7.4% from Dollar General. This price difference seems to be hurting Family Dollar, as same-store sales in its last reported quarter were flat from the year-ago period. Its revenue grew just 5.8% and missed consensus estimates, and the future doesn't look too rosy, either. 

Family Dollar's outlook wasn't inspiring, as the company expects same-store sales to decline in the low single digits in the current quarter. This would be a far cry from the 6.6% growth it had witnessed in the year-ago quarter. CEO Howard Levine had stated on the previous conference call that "high unemployment levels, higher taxes and continued uncertainty in Washington will likely continue to pressure our customers' income."  

Thus, while Family Dollar might be a good option for shoppers who don't have access to a Dollar General store, it doesn't look like a good buy for investors due to higher pricing.

Dollar Tree -- Doing it differently
Dollar Tree, the smallest dollar store chain of the lot, doesn't feature on Kantar's top-six list. Moreover, Dollar Tree is the most expensive of the three on a trailing P/E basis as well.

Now, Dollar Tree not featuring among the lowest price providers of items could be due to the fact that it doesn't sell tobacco products. But Dollar Tree is among the leading retailers in the U.S. offering items for $1 or less. To satisfy more customers, the company has lifted the $1 restriction at its Deal$concept. 

Dollar Tree has managed to keep its gross profit margin constant as it is not willing to grow by selling low-margin products such as tobacco. Instead, with just 4,800-plus stores, the company has a lot of room for expansion. Management believes that there is potential for 7,000 of its stores in the U.S., while it aims to grow to 1,000 stores in Canada from the present 160. In addition, the company has been focusing on opening stores with higher productivity to derive maximum value from its real estate investments.

Dollar Tree is also rolling out coolers and freezers across its stores at a fast pace -- 3,000 stores now carry frozen and refrigerated products. Management has observed that frozen and refrigerated products lead to an increase in store traffic, driving overall sales. Hence, as coolers are installed at more stores, Dollar Tree should continue gaining. 

In fact, Dollar Tree is the best-performing dollar store of the three, appreciating 50% this year. Its recent performance has been good as sales increased 8.8% in the previous quarter and comps grew 3.7%. Its growth plans look impressive and it is also looking to drive impulse sales by refreshing merchandise around checkout lanes.

Dollar Tree might be most expensive of the three on valuation at a P/E of 21 (Dollar General and Family Dollar trade at 19.6 times and 18 times, respectively). But an expected earnings growth CAGR of 17% for the next five years is better than others as well (Dollar General's is 15% and Family Dollar's is 11%). 

Bottom line
Dollar General looks like a good pick for both shoppers and investors. Its low pricing and aggressive growth plans have been successful already and the trend could continue in the holiday season and beyond. Family Dollar is going through some tough times, so it is best used as an alternative to Dollar General while shopping, but should be avoided as an investment. Finally, for those looking for the best deals at the $1 price point and superior earnings growth, Dollar Tree would be a good bet.

Two more ideas
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.


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