The Real Winners This Holiday Shopping Season Might Be the Dollar Stores

Now that the holiday shopping season is upon us, one set of winners is clearly the dollar store chains. Since the U.S. labor market remains weak, the dollar stores offer the best deals for consumers to stretch their purse strings. Every dollar counts, and even consumers that regularly shopped at Kmart and Wal-Mart are now shopping at Dollar General  (NYSE: DG  ) , Dollar Tree Stores  (NASDAQ: DLTR  ) , and Family Dollar Stores  (NYSE: FDO  ) . Since there are now more dollar stores than drug stores in the U.S., finding a bargain won't be that difficult.

Follow the leader
The largest of the dollar stores is Dollar General. The company was founded in Tennessee and was originally called J.L. Turner & Son, but changed its name to Dollar General in 1968. Today there are more than 11,000 stores spread across 40 states.

Dollar General didn't wait for Black Friday to kick off the holiday shopping season. Its stores were open at 7 a.m. on both Thanksgiving and Black Friday. For online shoppers, customers purchasing more than $35 in merchandise this holiday season receive free shipping.

Dollar General isn't just going after Black Friday sales, but is offering 34 days of savings on electronics, toys, clothing, home decor, and other holiday needs both in-store and online.

Dave D'Arezzo, Dollar General's executive vice president and chief merchandising officer, said, "We are proud to help our customers further stretch their dollar this holiday season by offering specials and providing additional discounts on the season's best gifts, décor[,] and more."

Everything is $1
Dollar Tree remains true to its roots as a dollar store. Its 4,700 stores offer household items, party supplies, toys, health and beauty items, and food -- all priced at $1. So for Dollar Tree, the retailer benefits not only from its holiday specials but also from its everyday specials, which are tough to beat.

In the third quarter, net sales increased 9.5% compared to last year while comparable-store sales increased 3.1%. Earnings per share rose 13.7% and the retailer's operating margin increased 10 basis points to 10.8%. The strong results were driven by increased store traffic as value-conscious shoppers chose to take advantage of Dollar Tree's $1 items.

For investors, Dollar Tree has a $2 billion share-buyback program in place. With a total market cap of around $12 billion, this buyback program will go a long way in reducing the company's share count. There has also been speculation that Dollar Tree could be a takeover target for Dollar General. That would be a great deal for both companies as the two retailers complement each other; they could consolidate certain operations and reduce expenses.

A combination of both
Family Dollar looks to be a little bit of both Dollar General and Dollar Tree. At Family Dollar, you'll find many $5 items at its more than 8,000 stores spread across 46 states. Its stores sell household-cleaning supplies, food, paper products, clothing, electronics, tobacco, and seasonal goods.

For this holiday shopping season, Family Dollar is offering plenty of $5 specials on toys and stocking stuffers from Mattel and Disney for kids. On Thanksgiving, the retailer offered specials on the purchase of a second item for up to 70% off. I think these types of deals appeal to many shoppers this holiday season.

This year, Family Dollar opened 500 new stores and comparable-store sales increased 3%. Next year, the company plans to open 525 new stores and repurchase $100 million in shares.

Chairman and CEO Howard Levine said of the results, "While the environment was more challenging than expected, I am pleased with our progress. We have increased our market share, we have stabilized margins[,] and we are increasing profitability. Our strategy is working, and we remain on course with our long-term goal to drive continued profitable growth and increase shareholder returns."

Foolish assessment
I still see the dollar stores benefiting from the weak labor market as more and more shoppers look to stretch their budgets. While Wall Street has recovered from the financial crisis, Main Street still has not. This is particularly true for low- and middle-income shoppers and their families.

For investors looking to add to their portfolios, Family Dollar sports the lowest P/E and price-to-sales ratios. Dollar Tree has the highest gross margin and operating margin. Dollar General has the highest quarterly revenue growth on a year-over-year basis. Dollar Tree has risen the most in the past year as there is a bit of takeover premium built into the stock. Shares of Family Dollar are trading at the same level as they were last year.

Overall, all three retailers should do well this holiday shopping season and as we head into 2014. 

Are the dollar stores destroying Wal-Mart?
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