Dollar General, Dollar Tree, or Family Dollar: Which One Should You Buy?

The economic recovery is still patchy, consumers are controlling their spending, and the burden of additional payroll taxes isn't making things any better. As a result, consumers are looking for bargains, and they are going from one store to another to grab the best deal while shopping for consumables. This is why dollar stores like Dollar General (NYSE: DG  ) , Family Dollar Stores,  (NYSE: FDO  ) , and Dollar Tree Stores (NASDAQ: DLTR  ) rely the most on consumables for driving traffic to stores. 

The popularity and growth of dollar stores is one of the legacies of the "Great Recession." They thrive by catering to bargain hunters and those with a smaller monthly shopping basket as consumers try to stretch their dollars. Let's take a look at how these companies have performed recently and how each of them could do in the future.

Bigger is better
Dollar General is the largest of the three, with a store count of 11,061 stores spread across 40 states. It is still expanding at a brisk pace, having added 577 new stores and remodeled or relocated 534 stores during the first nine months of fiscal 2013. It plans to open 73 new stores in the fourth quarter. In 2014, Dollar General plans to open approximately 700 new stores and relocate or remodel approximately 525 stores, resulting in square footage growth of 6% to 7%.

The new stores, remodels, and relocated stores are driving comparable-store sales, or comps, because consumers are able to access more products with the new layout, according to management. During the third quarter, the company reported comps growth of 4.4% due to higher traffic and average transaction count.

On the back of positive comps and new store openings and remodels, net sales surged 10.5% to approximately $4.4 billion but fell short of consensus estimates. A large part of the revenue increase was due to an 11.9% jump in the consumables category, which accounts for about 75% of total revenue.

The consumables market is worth $800 billion in the U.S., and every player is aiming for its share of the pie. Sales of consumables continue to be robust as a result of strong sales of tobacco products, perishables, candy, and snacks.

Going forward, Dollar General expects total sales for the full year to increase 10% to 10.5% versus the previous fiscal period. Full-year same-store sales are expected to increase 4% to 4.5%. The company also revised the low end of its earnings-per-share guidance for the full year to $3.18 from $3.15.

Family Dollar is struggling
Family Dollar is much smaller than Dollar General in terms of the store count, which stands at less than 8,000 in 45 states in the U.S.  Family Dollar is also based on Dollar General's formula of providing discount food, home and clothing products, and caters to similar target-customers. Just like Dollar General, the consumables category was a major growth driver and accounted for nearly 74% of revenue in the recently reported quarter. The company reported a 5.8% increase in revenue to $2.5 billion from the prior-year's quarter. However, it fell short of consensus estimates, primarily because of flat comps.

Family Dollar management has taken a cautious approach for 2014. The company projects earnings in the range of $0.65 to $0.75 a share for the first quarter and between $3.80 and $4.15 per share for fiscal 2014. Comps are expected to decline in the low single-digit range during the first quarter. These aren't good signals, and this is pretty much evident from the year-to-date gains as compared to peers as shown in the chart below.

DG Chart

Dollar General data by YCharts

Dollar Tree: big opportunity ahead
Dollar Tree is the smallest of the three and is a true dollar store as it offers many products at the price point of $1. However, its third-quarter results were weak and it missed earnings and revenue estimates. That said, it was not all gloom and doom for Dollar Tree. It reported a revenue jump of 9.5% to $1.9 billion, comps increased 3.1%, and earnings per share increased 13.7% to $0.58.

Going forward, management is quite confident about the company's growth prospects. Management sees the potential to grow from 4,800 stores to 7,000 in the U.S and up to 1,000 stores in Canada. During the quarter, Dollar Tree added 117 stores, taking the total store count to 4,953. The company remains on track to open 340 new stores, relocate 75 stores, and expand nearly 413 projects in the U.S. and Canada for fiscal 2013.

In addition, Dollar Tree's online presence is getting stronger, and in the previous quarter it increased offerings by 40% on its website. It is now offering more than 3,800 items online, including more than 1,700 items in less-than-a-case pack quantity. Its online venture, Dollar Tree Direct, should help in incremental sales going forward.

Bottom line
Dollar Tree and Dollar General are the picks of the litter in the dollar-store segment, while Family Dollar is struggling. While Dollar Tree had slipped in the previous quarter, its long-term prospects remain bright and the company sees good opportunity to grow its store count in the future. Dollar General, on the other hand, is the biggest dollar-store chain and it is intent on staying ahead of the pack as its initiatives suggest.

So, investors looking to benefit from tight consumer spending should take a look at Dollar General or Dollar Tree for their portfolio.

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