store chains have been flourishing as the economy is still sluggish and consumers are cash-strapped as a result of higher payroll taxes. Dollar stores gained popularity during the great recession, and now the three of them -- Dollar Tree Stores (NASDAQ:DLTR), Family Dollar Stores (NYSE:FDO), and Dollar General (NYSE:DG) -- are fiercely fighting for more market share.

In order to gain more customers and fuel their growth, all three have expanded rapidly, and this has resulted in overcrowding of stores within close proximity of each other. This has led to stores cannibalizing each other which reflects in the performance of the three companies in one form or another.

Dollar Tree is losing momentum
Dollar Tree, the smallest of the three in terms of store count, has been performing reasonably well over the last few years. However, it seems that cannibalization is taking its toll. Its third-quarter results failed to meet the Street's expectations. Let's take a look at what Dollar Tree's recent quarterly results reveal and how it is positioned versus its peers.

In its third quarter, Dollar Tree posted a revenue gain of 9.5% on a year-over-year basis to $1.88 billion , missing the consensus estimate of $1.91 billion. Revenue was primarily driven by a 7% jump in retail selling square footage and a 3.1% increase in comparable-store sales, or comps, versus last year. The growth in retail square footage was due to the opening of 117 new stores, the expansion or relocation of 19 stores, and the shutdown of six stores during the quarter.

Dollar Tree's gross margin also expanded by 10 basis points and earnings jumped 13.7% to $0.58 per share. This growth was, however, not enough to beat the Street's estimate.

Going forward, Dollar Tree expects low single-digit comps growth and square footage growth of 7% in the fourth quarter. The top line is expected to be in the range of $2.25 billion-$2.31 billion and earnings are expected to be in the range of $1.01-$1.07 per share.

Dollar Tree has been emphasizing the need for margin expansion and revenue growth through the introduction of private-label offerings as they result in higher margins. It has also expanded its frozen and refrigerated food item selection as a result of robust demand for such items from consumers.

Family Dollar is the laggard
Taking a cue from Dollar Tree, Family Dollar partnered with McLane in order to add an assortment of products in the frozen and refrigerated food categories to make the space more competitive.

However, Family Dollar had flat comps in its recently reported quarter, and perhaps this is an after-effect of too much crowding in the dollar-store space. This came after an earlier projection of 2% growth in comps, so the company is struggling to meet its own expectations on comps. It also failed to meet the consensus estimate on revenue, which grew 5.8% to $2.5 billion versus the comparable quarter a year earlier.

On the earnings front, the company saw growth of 14.7% to $0.86 per share which compares with $0.75 in the prior-year quarter. However, based on store traffic trends, Family Dollar issued weak guidance for the upcoming quarter.

Family Dollar expects earnings in the range of $0.65-$0.75 a share for the first quarter and it also expects comps to decline in the low-single digit range. Based on Family Dollar's weak performance, analysts and commentators are speculating about the takeover of Family Dollar by its biggest rival, Dollar General .

Dollar General is undergoing rapid expansion
The merger of Dollar General and Family Dollar would, in fact, create the largest small-box retailer in the U.S. and also strategically position the combined company to offer good competition to Wal-Mart's move of opening neighborhood stores. The scale of combined operations would also offer stiff competition to drugstores. Edward Kelly, a food and drug retail analyst at Credit Suisse, evaluated a potential merger and found that it would make strategic sense, even at a large premium .

Dollar General is the largest of the three with a store count of 11,061 stores spread across 40 states and it still manages to grow its store footprint at a decent pace. In 2014, it plans to open approximately 700 new stores and relocate or remodel approximately 525 stores, resulting in square footage growth of 6% to 7%. This is almost at par with Dollar Tree's projected 7% square footage growth.

Dollar General reported a comps gain of 4.4%, faster comps growth than either Dollar Tree or Family Dollar. On the back of this robust comps gain, new store openings, and remodels, Dollar General's revenue increased by 10.5% to $4.38 billion, with the consumables category being the star performer with 11.9% growth .

The consumables category is important as it constituted about 75% of total revenue for Dollar General in the reported quarter. The consumables market is worth $800 billion in the U.S., and double-digit growth in this segment reflects that Dollar General is moving in the right direction to grab more market share.

Bottom line
Dollar General's size could play an important role going forward as it looks to dominate the dollar store space. The company saw the best same-store sale growth in the previous quarter and its revenue growth was in double digits. Also, it is planning to open a higher number of stores than the other two in absolute terms, although the square footage growth in percentage terms is expected to remain identical to the others due to the bigger size of Dollar General.

Hence, Dollar General might be the best positioned of these three retailers in the future and investors should consider choosing it over the other two.

Fool contributor Mukesh Baghel 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.