Which Is the Best Discount Retail Stock?

Discount retail remains a busy market segment irrespective of the economic environment. When the economy is struggling and consumer confidence is low, discount retailers are preferred destinations for their "value for money" deals. Let's take a look at Big Lots (NYSE: BIG  ) and the value it holds for investors when stacked up against other discount retailers like Dollar General (NYSE: DG  ) and Family Dollar Stores (NYSE: FDO  ) .

Analyzing Big Lots
Big Lots has had a roller-coaster ride despite recording top-line growth, and it has been a laggard as compared to peers as shown in the chart below.

BIG Revenue (TTM) Chart

Big Lots revenue (trailing-12 months) data by YCharts

Whereas fueling revenue growth by investing in new stores is good, if the comps aren't improving, then it means that the company is not connecting well with its target customers. Instead, that company is probably resorting to capital-intensive means to drive top-line growth.

In 2011, comps came in at 0.1%, down from the 2.5% growth in fiscal 2010. In fiscal 2012, the situation took a turn for the worse with comps declining 2.7% versus the prior year. The trend continued in its third quarter of fiscal 2013, and it is no surprise that the CEO had to say "I'm not happy with our results."

In the third quarter, the U.S. and Canadian comps declined by 2.5% and 0.9%, respectively, as compared to the comparable period last year. Its consolidated comps declined 2.5% versus the year-ago quarter.

Worse, Big Lots offered a very conservative outlook going forward. For the fourth quarter, it expects revenue to decrease 6%-8% while comps are expected to decline in the low-to mid-single digit range. This was enough to spook investors. As a result, the stock has taken a terrible beating on the market since then, losing almost 33% from its peak.

Big Lots' consolidated adjusted loss per share came in at $0.16 in the previous quarter. Going forward, Big Lots has decided to exit the non-profitable Canadian market in order to bolster its chances of competing with bigger industry rivals like Target, Wal-Mart Stores, and Dollar General. Big Lots is also trying to focus on bolstering areas such as e-commerce and its omnichannel capabilities, but as evidenced by its muted guidance, these initiatives aren't going to be adding up favorably any time soon.

What are peers up to?
On the other hand, Dollar General has been on a roll and leads the pack when it comes to revenue growth over the past five years. Whereas Big Lots suffered a comps decline across all of its markets, Dollar General registered comps growth of 4.4% in its third quarter. In fact, every week in the quarter displayed positive comps growth. Both traffic and average ticket size increased for the 23rd consecutive quarter, and this shows that the company is connecting well with its consumers.

On the heels of traffic-fueled comps growth and the opening of 577 new stores during the first nine months of 2013, third-quarter sales increased 10.5% over last year to $4.4 billion. Dollar General's market share in the consumables segment has increased steadily throughout the past 52-week period, as per Nielsen data for October. This is important because the consumables category accounts for about 75% of total revenue. Going forward, Dollar General is confident it can achieve 10% to 10.5% revenue growth versus the previous fiscal period on the back of 4% to 4.5% year-over-year comps growth.

Family Dollar's revenue growth over the past five years has been more than twice that of Big Lots' as shown in the chart above. However, recently, it seems to be struggling. Comps stayed flat against the company's earlier expectations of 2% growth. Management isn't optimistic for 2014. Comps are expected to decline in the low-single digit range during the first quarter. Family Dollar is expecting earnings in the range of $0.65 to $0.75 a share for the first quarter and between $3.80 and $4.15 per share for fiscal 2014.

Bottom line
Of the three, it looks like Dollar General is in the best position due to its comps growth and aggressive expansion. The company is gaining market share in the important consumables category and looks set for further growth. Big Lots could prove to be a good investment as well, but investors should wait for the company to return to positive comps growth.

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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 11, 2014, at 9:43 AM, textamex wrote:

    I bought DG at 27 before Warren Buffett took a shine to it. I have watched our local store (new) very critically since that time: I believe that DG is a under achiever because I can see many ways that it can function more efficiently. If they improve their management we can see much more upside. Their store brand is superior to any other discount retailer. They have the distribution and are targeting the correct customer base. You just have to kick tires to evaluate a company.

  • Report this Comment On February 12, 2014, at 12:41 PM, textamex wrote:

    I believe DG needs to fine tune it's inventory to the customer base. Maybe there are to many inventory decisions imposed by upper management.

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Related Tickers

9/3/2015 4:01 PM
BIG $46.43 Down -0.65 -1.38%
Big Lots CAPS Rating: ***
DG $72.16 Down -0.09 -0.12%
Dollar General CAPS Rating: ***
FDO $0.00 Down +0.00 +0.00%
Family Dollar Stor… CAPS Rating: ***