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Which Dollar Store Is Still in Trouble?

Family Dollar Stores (NYSE: FDO  ) is one of the three big dollar stores operating in the U.S., but it still remains the worst investment of the trio. Family Dollar managed to miss fiscal 2014 first-quarter earnings, and comparable-store sales dropped by 2.8% year over year. As a result, full fiscal-year 2014 earnings-per-share revisions over the last 30 days have been revised downward from $3.98 to $3.41.

It looks like the interim will be weak for Family Dollar given the company's struggles with trying to find a viable marketing strategy and a growth strategy that will work in an improving economy. As employment rises and consumer spending increases, individuals will be trading up to the likes of Wal-Mart and Target.

A step in the wrong direction when it comes to marketing
Family Dollar appears to be getting even more aggressive when it comes to promotions. It recently traded in its $5-off when you spend $25 coupons for $3-off when you spend $15. However, the average basket size at Family Dollar remains a mere $10.

Family Dollar is also cutting back its level of circulars, starting in Q2 2014. During 2013, the company issued 33 circulars. This move might prove to be troublesome, as J.C. Penney made a similar move in 2012 but has since backtracked to offering promotions.

The industry is flush with competition
While Family Dollar is competing with the major department retailers, like Wal-Mart and Target, it's also battling Dollar General (NYSE: DG  ) and Dollar Tree Stores (NASDAQ: DLTR  ) , which also operate in the dollar-store industry. All three dollar store stocks are up more than 100% during the last five years.

Yet, again, as the economy rebounds, investors might be looking to trade up--however, the companies are still increasing their store numbers. PWC and Kantar Retail believe that discount retailers will grow stores the fastest among the retail space. The continued increase in the number of stores in the industry is not a positive when the industry sales could start to weaken in a rebounding economy. 

Dollar Tree, the smallest dollar-store operator, managed to see solid 9.5% growth last fiscal year. However, it missed revenue consensus and the growth was primarily driven by store openings. Retail square footage was up 7% thanks to the opening of more than 110 stores.

Dollar General is the leader in the dollar-store space by store count, boasting more than 11,000 retail locations. It expects to continue growing its real estate footprint by more than 6% annually over the interim. It's also planning to open more than 600 stores this year and remodel in excess of 350.

On a positive note, Dollar General does spend the lowest amount of revenue on selling, general, and administrative expenses. Over the trailing-12 months, Dollar General has spent 21% of its revenue on SG&A. Dollar Tree spends 23%, and it's no surprise that Family Dollar is spending the highest, at 28%. This high amount of SG&A spending is likely the reason that Family Dollar is looking to curtail circulars in 2014. However, in this case, the lowering of SG&A might also have an impact on the company's top line, leading to slower revenue growth.

Bottom line
Raymond James, the investment firm, believes that Family Dollar should be trading at a discount to major peers, given the company's inferior sales productivity. Family Dollar's price-to-earnings-to-growth ratio is a very high 3.3. Anything above a 2 is considered expensive. By all accounts, Family Dollar is the worst positioned of the three. However, Dollar General only trades at a 1.1 PEG ratio and has the lowest price-to-earnings ratio at 15.4 times. Don't forget it also has the largest store base of the three. Investors should avoid Family Dollar and invest in Dollar General for expsoure to the industry.

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Read/Post Comments (6) | Recommend This Article (7)

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.

  • Report this Comment On February 05, 2014, at 3:12 PM, SherrenofHavasu wrote:

    Perhaps it's because the actual name should be "Nothing Costs Only a Dollar" Customers may have been born at night, but not last night. I know I wasn't

  • Report this Comment On February 05, 2014, at 3:20 PM, ScamuelJones wrote:

    If Family Dollar would clean up its filthy stores, quit lying about prices in their ads (which they never have when you go to get them), and quit overpricing their junky Chinese crap, they might get a little business. Dollar General and Dollar Tree are BOTH far superior!

  • Report this Comment On February 05, 2014, at 7:52 PM, kat13 wrote:

    I personally wouldn't start shopping else where for certain things. I'll always be a smart shopper and save where I can, get the most for my money even if/ when I win the lotto. How else is one to save, be okay, or stay rich once they are? Make your money work for you. Wal-Mart and Target have been competing with Dollar stores for a while and I love those $1 or less deals, also always go to Target for the clearance items. But no matter what Dollar Tree will be one store I hit every two weeks. I've gotten some really great deals there and thrown beautiful parties because of them. Family dollar is often busy in my area. If they're smart they'll know where to place themselves and keep customers coming in.

  • Report this Comment On February 06, 2014, at 12:27 PM, rkinne01 wrote:

    I can confirm what Scamuel Jones said, these stores are filthy! I got a job at Family Dollar briefly to find the place was disgusting, the shelves were dirty, the floors weren't kept clean, and place was packed with mice and rats. I was admonished when I started cleaning one day, management told me there were better things to than clean.

    I also found that stocking system was an automated system that seemed left over from 1980. It ordered an predetermined amount of a particular item with no way to override it. So if we sold 5 brooms the computer would order 20 more, even if we only needed 5 replacements.

  • Report this Comment On February 06, 2014, at 7:33 PM, fudyjaye wrote:

    The problem with Family Dollar stores is not in marketing, in my opinion. Rather it is in the fact that they are poorly managed and in need of repairs. Their prices are fair but what keeps people out is their lack of workers, their untidiness, and an all over unkempt and unclean workplace. That is my opinion overall of Family Dollar stores, with others not far behind them. Respectfully fudyjaye

  • Report this Comment On February 07, 2014, at 7:57 AM, thedawg60 wrote:

    yes i agree with all comments.Dirty stores at FD walk in like walking in to a dust bowl dont even discuss floors just Nasty.Inventory always out.Some due to sales other cause of theft.Seems they are put in the worst part of the city.The store in my home town was closed due to theft.

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