There's Still Money to Be Made in Dollar Stores

Dollar General (NYSE: DG  ) looks to be investors' best dollar-store bet for 2014. This comes as Family Dollar Stores  (UNKNOWN: FDO.DL  ) will likely be one of the worst performers. Why does Dollar General win out? Despite being the nation's largest dollar store, the company still has some of the best growth prospects. Dollar General has some 10,000 locations, while Family Dollar has 7,500 and Dollar Tree Stores (NASDAQ: DLTR  ) has less than 5,000.

The beauty of the dollar-store business model is that it has proven to be resilient regardless of the economic environment. Dollar General has remained at the forefront of the industry, not only in store growth but also when it comes to various other initiatives. Going forward, the company should perform nicely as it continues the roll out of other productivity initiatives. A few of these include increasing its consumables and perishables offerings, which should drive more traffic.

Enough to go around for all the dollar stores?
The economic outlook is getting stronger, yet the dollar stores have already become a large part of consumers' lives and should remain so throughout 2014. Further driving positive performance at the dollar stores should be lower gas prices and relief from the 2% payroll tax.

How Dollar General separates itself
Despite having more than 11,000 stores, Dollar General has shown no signs of a slowdown when it comes to store openings. Dollar General opened more than 500 new stores during the first nine months of 2013. For fiscal 2014, the company is looking to open another 700 stores. Helping meet the increased demand, Dollar General is looking to bring a new distribution center in Pennsylvania online during the first part of fiscal 2014.

Dollar General's third-quarter results came in very positive, driven by consumables. The dollar store ended up posting earnings per share of $0.72, up 14% year over year. This was on the back of 10.5% net sales growth and a near 12% jump revenue for the consumables category. Beyond just the typical consumables, Dollar General is turning to tobacco to boost sales. The other big aspect is that the company is turning towards refrigerated items.

Another solid aspect of Dollar General is that comp-store sales continue to soar. Indeed, 2012 marked the 23rd consecutive year of comp-store-sales growth. For fiscal 2013, Dollar General expects to post a comp-store-sales increases of 4% to 4.5% year-over-year.

In addition, Dollar General continues to separate itself in analysts' eyes. Of the 24 analysts following Dollar General, 15 have a Buy rating. Meanwhile, Family Dollar has a resounding Sell/Hold rating, with 25 of the 30 analysts following the stock having a Hold rating or lower.

It is worth noting that Dollar Tree has managed 15 straight years of revenue and earnings growth. However, both notable competitors, Family Dollar and Dollar Tree, are laggards compared to Dollar General. Family Dollar's recent quarterly same-store sales came in flat, Dollar Tree's were up 3.7%, while Dollar General's were up 5.1%.

Bottom line
Dollar General isn't the cheapest of the big three dollar stores, but it does appear to be the best positioned for future growth. With a 1.3 PEG, the dollar-store investment appears to be quite compelling. Its return on equity is more than 20% and analysts expect EPS to grow at an annualized 15% over the next five years. The company will continue to perform nicely over the interim as consumers continue to frequent dollar stores. 

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