Is This Dollar Store a True Value Play?

One of the top dollar store chains continues to be a big disappointment for investors.

Apr 28, 2014 at 3:00PM

Value investing involves buying stocks that have been beaten down to well below what they're worth. However, there are times when stocks look cheap for a good reason. Family Dollar (NYSE:FDO) appears cheap, but is there a good reason for investors to stay away?

The worst investment in the dollar store sector
Earlier this month, Family Dollar missed earnings expectations for the second straight quarter. This time, earnings were off by 11%. All sixteen analysts following Family Dollar have lowered their expectations for the current quarter (ending in May). With the weakness that Family Dollar is seeing, it still trades relatively in-line with Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) from a valuation standpoint.

The potential for a buyout of Family Dollar has been buoying the stock's price. However, that talk has faded over the past couple months. Management is in flux as its COO recently left, and the company just appointed a new CMO.

All the dollar stores face certain macro pressures, including consumers' inclination to trade up to Target and Wal-Mart. One potential opportunity for the dollar stores to gain market share in is tobacco products. With CVS Caremark deciding to stop selling tobacco products, these companies should manage to capture some of that new business. Convincing shoppers to buy tobacco products at their stores versus convenience stores will likely lead to sales of other products such as consumables and personal-care products.

What about the other dollar stores?
With the potential issue of consumers trading up from dollar stores, is it wise to avoid the industry altogether? Dollar General remains the dominant leader in the space, with over 10,000 stores. That gives Dollar General an impressive advantage. However, the other aspect is that the company plans to continue expanding. It opened some 650 stores in 2013, and plans to open another 700 this year. Its large and growing store base should help it better fend off the competition.

But it's not just store expansion that's driving growth. Even its current store base is generating impressive sales. Fiscal 2013 marked the twenty-fourth consecutive year of comparable-store-sales growth for Dollar General.

Dollar Tree has the lowest store count of the three. It too missed earnings earlier this year, by just 3%, but its stock price has actually held up the best over the last month. It's also trying to catch Family Dollar when it comes to store count. Last year, it opened nearly 350 stores. The big potential disadvantage for Dollar Tree is that it has yet to offer tobacco products.

How shares stack up
As mentioned, shares of Family Dollar are holding up nicely, despite the fact that it might be the worst investment of the three. Family Dollar trades at a P/E of 17, which is the same P/E as Dollar General. Meanwhile, Dollar Tree trades at a P/E of 19.

Worth noting is that Family Dollar offers a dividend with a current yield of 2.2%. The other two don't offer a dividend. However, as we dig deeper, we find that Family Dollar has a profit margin that's 3.8%. That's well below Dollar General's 5.9% and Dollar Tree's 7.6%.

Bottom line
Dollar General remains the best bet of all the dollar stores. It has a strong, and growing, store base. With its 10,000 stores, it remains positioned the best to compete with other retailers fighting for consumers. If you're searching for the top investment in the dollar store industry, Dollar General is worth a closer look.

Will this stock be your next ten-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with amazing potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303%! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Marshall Hargrave 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