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Source:  Dollar General

Dollar General, Dollar Tree, Family Dollar Stores... when we talk about this triumvirate of discount variety chains we're comparing apples to apples, right?

Well, not exactly. Although Dollar General (NYSE:DG), Dollar Tree (NASDAQ:DLTR), and Family Dollar Stores (NYSE:FDO) are often viewed by investors, shoppers and analysts as concepts cut from the identical retail cloth, there is an odd one out in this group. Ignoring this distinction -- and treating these companies as equals on the same competitive playing field -- is a mistake that could steer your analysis way off course.

Do you prefer dividends or buybacks?
Here's the good news: Even though each of these companies has different levels of comparable growth, all three chains are making money. What they're doing with that money is where we start to see the differences.

First, there's the dividend darling. In the last reported quarter, Family Dollar saw sales inch up 3.2% to $2.5 billion, same-store sales slip back 2.8%, and net income retreat 2.9% to $78 million. Of course, nobody likes to see declines in same-store sales and profits, but Family Dollar continues to bring in the bucks.

On Jan. 16, Family Dollar raised its dividend by 19.2% to $0.31, which suggests that the bucks are continuing to pour in and the company continues to be confident about the future. CEO Howard Levine pointed out that the company has been raising its dividend for 38 years in a row.

If you're looking for growth, then Dollar Tree is the discounter that'll turn your head. Last quarter, Dollar Tree saw sales jump 9.55% to $1.88 billion which is starting to catch up with Family Dollar's sales of $2.5 billion. Dollar Tree's same-store sales went up 3.1% while adjusted earnings per share climbed 13.7% to $0.58.

While Dollar Tree doesn't pay a dividend, it is aggressively returning capital to shareholders in the form of a stock buyback program, which is set at $1 billion and due to be executed in full by June of this year.

So, while both Dollar Tree and Family Dollar both sell products priced at $1 or less a piece (at least 90% of Family Dollar's products are priced that way), they are different companies that have different results and different ideas about how to grow.

That brings us to a totally different player -- Dollar General -- and its different concept and different prospects.

It's hard to measure up when you're not playing the same game
You'd never look at Dollar General without comparing its results to Dollar Tree and Family Dollar. When the latter two fail to measure up to Dollar General -- or, vice-versa -- it certainly makes it easier to come to conclusions.

Don't make that common mistake.

The only true dollar store of the group is Dollar Tree. Family Dollar is the next purest play since, as mentioned before, the majority of its products fall squarely in the $1 parameter.

Despite outward appearances, Dollar General is altogether a different beast. Like Dollar Tree and Family Dollar, the retailer sells low ticket groceries and other cheap merchandise. But most of its products are actually priced at more than $1.

That last point gives Dollar General an important advantage. It's much easier for Dollar General to raise the prices of its food items, say by 3%, in response to inflation than it is for Dollar Tree. Dollar and Three Cent Tree just doesn't have the same ring to it.

Another advantage is that Dollar General can more easily introduce more products at higher price points. In fact, it recently added tobacco to its shelves -- a move that has certainly bolstered sales. 

Where should your investing dollars go?
Of the three variety store discounters, Dollar General is doing the best growth-wise of the three. Last quarter, Dollar General's net sales popped 10.5% to $4.38 billion, same-store sales flew up by 4.4%, and earnings per share soared 14% to $0.72. It was the 23rd quarter in a row with higher traffic and higher average ticket for the chain.

As for which one is the better buy? I'm a bigger fan of buybacks over dividends myself as that action increases earnings per share while saying a lot about management's confidence that the stock price will go higher.

All three companies buy back shares, but Dollar Tree has the most aggressive buyback program relative to its market cap. 

 

Nickey Friedman 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.