Which Dollar Store Is Best of Breed?

Dollar General's (NYSE: DG  ) stock has appreciated 35.41% over the past year, which stemmed from the discount retailer perfectly positioning itself to target value-conscious consumers, many of which are on fixed incomes. However, over the past month, the stock has only appreciated 0.15%. This might stem from a shift in Dollar General's merchandise mix. Let's take a look at the situation, as well as how Dollar General stacks up against Dollar Tree (NASDAQ: DLTR  ) and Family Dollar (NYSE: FDO  ) .

Merchandise mix shift
In Dollar General's latest 10-Q, the company cited high unemployment, volatility in gas and food prices, high medical costs, weak housing (in some markets), and weak credit markets as reasons for a lack of consumer confidence. Despite these concerns, the company remains optimistic about its long-term prospects. At the same time, Dollar General concedes that consumers are shifting from purchasing high-margin non-consumables to lower-margin consumables. 

For instance, in the first quarter, Dollar General's gross profit declined to 30.3% versus 30.9% in the year-ago quarter. The good news is that the company still managed to drive its top line with ease, seeing total sales jump 10.5% to $4.38 billion and comps jump 4.4%. The latter was primarily due to increased foot traffic and average customer ticket.

These are positives, but shrinking margins are a negative, especially when this is expected to continue. Fortunately, Dollar General has a specific game plan to drive growth and cut costs in order to improve the bottom line.

Company priorities
Dollar General's four priorities are to drive productive sales growth, increase gross margin, leverage process improvements and IT to reduce costs, and strengthen and expand the culture of serving others.

In order to drive productive sales growth, Dollar General looks to expand its consumable offerings, matching consumer demands. Additionally, Dollar General will offer more tobacco, beer, and wine products. Store remodels and relocations are also in the works.

To expand margins, or at least slow their contraction, Dollar General will aim to offer more private brands, which will reduce costs. Furthermore, Dollar General will test its pricing power--however, if sales are effected, Dollar General will likely retreat.

For the record, Dollar General isn't like Dollar Tree. While Dollar Tree sells products for $1, Dollar General sells its products for $10 or less. Therefore, Dollar General has the ability to test different price points. On the other hand, if a Dollar General and Dollar Tree are close to one another geographically, a consumer is likely to visit Dollar Tree first. After all, whether they realize it or not, today's consumers are always looking to improve their margins as well.

To reduce SG&A expenses, Dollar General won't have much choice but to look at labor costs, and to a lesser extent, procurement savings. Since demand is higher for lower-margin consumables, there really aren't many other options.

As far as expanding the culture of serving others, Dollar General aims to keep its stores clean and well-stocked while continuing to offer high-quality products at low prices.

Now let's take a look at how Dollar General stacks up against its peers in the dollar store world.

Dollar store performance comparisons
While all three of the aforementioned companies have performed well over the past four years, Dollar Tree has driven its top line the fastest:

DG Revenue (TTM) Chart

DG Revenue (TTM) data by YCharts

This is interesting since Dollar Tree sells all items for just $1. This proves that pricing power isn't necessary to drive the top line. It's more about matching current consumer desires, and to that extent, Dollar Tree has hit a home run. Therefore, it shouldn't come as a surprise as to which of these companies has delivered the largest total shareholder return (stock appreciation plus dividends) over the past five years:

DG Total Return Price Chart

DG Total Return Price data by YCharts

However, this isn't to say Dollar General and Family Dollar aren't enticing. For instance, Dollar General has logical initiatives in place, and the brand still matches consumer demands.

Family Dollar, which is more focused on consistent promotions, is enticing for several reasons. One, it's trading at just 14 times forward earnings, whereas Dollar General and Dollar Tree are trading at 16 and 17 times forward earnings, respectively. Two, it generated $471.97 million in operating cash flow over the past year, giving it fiscal strength considering its balance sheet: $145 million in cash vs. $516.47 in long-term debt. In other words, debt can be paid off with ease and isn't a concern. Three, Family Dollar yields 1.60%, whereas Dollar General and Dollar Tree don't pay dividends.

All that said, while Dollar General and Family Dollar are impressive, Dollar Tree still appears to be best of breed. Think about how Amazon does whatever it takes to please the consumer. This approach has led to stellar top-line growth and stock appreciation. By selling all items at $1 each, Dollar Tree also caters perfectly to many of today's consumers, and it should continue to attract customers regardless of what is taking place in the economy. That's a nice feeling for an investor.

 

Top-Tier dividend companies to strongly consider 
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


Read/Post Comments (0) | Recommend This Article (1)

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.

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: 2773657, ~/Articles/ArticleHandler.aspx, 8/21/2014 3:42:11 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 16,979.13 59.54 0.35%
S&P 500 1,986.51 4.91 0.25%
NASD 4,526.48 -1.03 -0.02%

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

8/20/2014 4:01 PM
DG $63.76 Up +0.17 +0.27%
Dollar General CAPS Rating: ***
DLTR $55.00 Up +0.29 +0.53%
Dollar Tree Stores CAPS Rating: ***
FDO $79.81 Up +0.11 +0.14%
Family Dollar Stor… CAPS Rating: **

Advertisement