Whoa! This “Dollar Store” Isn’t Even a Dollar Store

Dollar General, Dollar Tree, and Family Dollar. Everyone thinks these stores are all the same. But the smart money can spot the oddball among them that has the best prospects for growth.

Feb 15, 2014 at 12:00PM

Wrmemv
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. 

Make every dollar count
Nothing's a bargain if it's not built to last. The most successful investors know to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

 

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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers