Dollar General and Other Discount Retail Buys

Dollar-store retailers are good for holiday shoppers and long-term investors alike. The deep discount stores offer bargains that give price-wary consumers a chance to stick to a tight budget this holiday season. Investors in this sector should also shop around to find the best buy.

The three leading dollar stores are Dollar General (NYSE: DG  ) , Dollar Tree Stores  (NASDAQ: DLTR  ) , and Family Dollar Stores (NYSE: FDO  ) . These stores have given so-called "big box" stores like Wal-Mart and Target a run for their money this year.

Dollar General's third-quarter rebound
After a tough second quarter, Dollar General reported that fiscal third-quarter earnings rose 14% compared to the same time period in 2012 as consumables sales posted strong growth. The sales are largely the result of the discount chain's store expansion and other maneuvers to pump up sales by selling tobacco and other consumables.

However, these are sales of mostly lower-margin items, which obviously hurt the outfit's margin. But Dollar General hopes to book higher average sales numbers while gaining market share. In fact, the retail shop has had an aggressive store-opening plan in play that will add 650 stores this year.

In short, the discounter's profit has grown by adding new stores and attracting bargain hunters with better-known brands on its shelves. Moreover, Dollar General is also redesigning its stores to provide customers with a better shopping experience in an effort to enhance the outfit's same-store sales performance.

In sum, for the period ended Nov. 1, Dollar General reported a profit of $237.4 million, or $0.74 a share, compared to $207.7 million or $0.62 a share, while revenue improved 11% to $4.4 billion compared to the same time period in 2012.

Going forward, the retail chain raised its earnings guidance for the year from $3.18 to $3.22 per share. This may be an indicator of higher margins triggered by offering better-known brands. However, Dollar General now anticipates a down-tick in revenue of 10% to 10.5% growth from its previous guidance of 10% to 11%.

Finally, the company plans to open approximately 700 new stores in fiscal 2014 and remodel or relocate approximately 525 stores. Despite the slightly lower revenue expectations, the company's aggressive growth strategy makes Dollar General a good discount buy in 2014.

Dollar General's competition
Dollar Tree is another leading deep discount retailer. For the third quarter, Dollar Tree recently reported that net sales grew 9.5% to $1.9 billion, same-store sales were up 3.1%, and adjusted earnings per share spiked by 13.7% to $0.58.

These robust figures were attributed to the persistently weak economy driving new consumers through the discount chain's doors. Just like Dollar General, Dollar Tree also saw higher foot traffic and rising average ticket sales due to its wider selection of consumables. Chief executive officer Bob Sasser noted the retailer's solid performance came during a "very cautious consumer environment."

Dollar Tree also has a bold growth plan. In fact, the company's management believes in the long run they can expand from 4,800 stores to 7,000 outlets in the US, while adding another 800-plus stores in Canada from the present 160. Finally, the discount chain has an aggressive share-repurchase plan in play to buy back $2 billion of its stock. Not only will this reduce the average price paid per share from the initial $1 billion buyback, but also it will support future earnings.

Like its rivals, Family Dollar has continued to grow by opening 500 new stores in fiscal 2013. The discount chain has also been busy renovating 825 stores in order to enhance customers' shopping experience.

During fiscal 2013, the company saw net sales increase by 11.4% to 10.4 billion compared to fiscal 2012, while net income was up by 5.1% to $443.6 million and diluted net income per common share also climbed 7% to $3.83.

In the coming year, Family Dollar plans to open another 525 stores while continuing its renovation program. And the discount chain is keeping a close eye on its inventory by jettisoning unproductive merchandise while offering its customers a better variety of private brands, apparel, and consumables.

The bottom line 
Dollar General, Dollar Tree, and Family Dollar will continue to grow in the coming year. The only caveat is if the deep discount retailers can maintain their market share as the economic recovery picks up and the stubborn unemployment rate abates, which will give consumers better discretionary purchasing power.

That being said, if the deep discount retailers continue to offer better-known brand names and move into new territory, these retailers should be solid long-term buys for investors provided they shop around.

Which companies are killing Wal-Mart?
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