With U.S. customers struggling with their budgets, dollar stores would be the most apt place to spend their hard earned money judiciously. Hence, Dollar General (NYSE:DG) had plenty of reasons to celebrate strong numbers in its recently reported quarter, which were accompanied by a bright outlook. Dollar General's third-quarter results beat the consensus estimates, sending its stock price north.

What makes Dollar General celebrate?
Driven by the addition of new stores and comparable-store-sales growth of 4.4%, Dollar General's revenue stood at $4.4 billion, an increase of 10.5% over last year. Sales of tobacco, snacks, and other perishable items led to a higher top line as these products attracted more people to stores. As people visited Dollar General's stores to buy tobacco, they bought other products as well. This led to higher store traffic and an increase in the average transaction size.

However, selling tobacco led to shrinking margins for Dollar General. On the other hand, rival Dollar Tree Stores (NASDAQ:DLTR) has been expanding its margins by remaining focused on high-margin private-label products. Also, Dollar Tree attracts great customer attention by offering products for $1, which is easy on shoppers' pockets.

Despite offering products at low prices and focusing on private-label products, the retailer's same-store sales could not match that of Dollar General's. Dollar Tree's same-store sales grew by 3.1% in the third quarter, lower than Dollar General's 4.4%. However, Dollar Tree has also been concentrating its efforts on refrigerated and frozen foods in order to lure more customers to its stores.

In fact, both Dollar General and Dollar Tree have been doing better when compared to peer Family Dollar Stores (NYSE:FDO), as reflected by changes in stock price since the beginning of this year.

DG Chart

Dollar General data by YCharts

Although Family Dollar also offers tobacco and other similar products, it has been unable to perform as well as Dollar General. Hence, its stock price has also been almost flat since the beginning of the year. However, the company has been trying to expand its wings by opening more stores. Family Dollar added 500 new stores during the year and plans to expand by another 525 stores next year. Also, the retailer has partnered with McLane to enhance its refrigerated-foods segment.

Also, Family Dollar has been trying to increase its promotional activities in order to lure customers in during the holiday season. As stated by Mark Yagalla, the retailer will be offering $5 specials on various products such as toys. Other deals such as 70% off on the purchase of a second item will be a highlight during the peak season. This might help the company boost its revenue.

However, Dollar Tree has been a tough competitor for Dollar General with a different approach to attract customers. It will be interesting to see how Dollar General fares with its low-margin product strategy against Dollar Tree's high-margin private-label offerings.

Celebrations indeed
Dollar General's addition of tobacco has strengthened its consumables segment, which grew 12% versus last year. Also, the company has taken many merchandising initiatives so that it can optimize its store space. For example, it reduced the space allocated to apparel in order to make more space for other consumables.

In addition, the company has been growing in size since it added 577 new outlets in the first three quarters of fiscal 2013. In fact, the retailer plans to add another 70 stores during the fourth quarter and 700 new stores in fiscal 2014. Hence, Dollar General seems to be growing quickly.

Lastly, the retailer plans to increase its marketing activities for the holiday season. Apart from keeping its stores open for extra hours and providing free home delivery for online shopping, the company has been providing many discounts, which will act as an additional attraction for its customers.

Final thoughts
Dollar General has been making the right moves. Its expansionary efforts and marketing strategies should help in boosting its top line further. Moreover, with an increase in U.S consumer spending, dollar stores are well positioned to make the most of it. Additionally, Dollar General is the largest dollar store with approximately 11,000 stores in its network. Hence, it is expected to benefit from the increase in spending.

 

 

Pratik Thacker has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.