In a stock market lacking in value opportunities, two dollar store chains appear to be as cheap as their goods. Those two are Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) which both hold compelling valuations, especially considering their growth opportunities and cash flow generation abilities. Cash-strapped consumers continue to pinch pennies and are scaling down their shopping habits. For better or worse, this means that well-run dollar stores in the United States, such as Dollar General and Dollar Tree, are in great shape.
Even better, both stocks are trading for reasonable valuations, even while the stock market keeps racing to new highs. If you're on the hunt for growth stocks trading for modest valuations, you should seriously consider Dollar General or Dollar Tree.
Growth at a reasonable price
Both Dollar General and Dollar Tree are doing well, even in a tough operating climate for retail. The brutal winter weather took a severe bite out of economic growth in the last two quarters, but both Dollar General and Dollar Tree weathered the storm. In addition, the dollar store industry more broadly is an intense competitive environment right now, one in which rivals are busily trying to outdo one another on price cuts.
Despite these headwinds, Dollar General and Dollar Tree are still growing. In the most recent quarter, Dollar General's same-store sales in the fourth quarter rose 1.3%, which isn't spectacular growth but is impressive in light of the tough operating climate. The previous quarter was even better, with same-store sales and earnings growth coming in at 4.4% and 10.5%, respectively. For the year, Dollar General racked up 3.3% same-store sales growth and 10% earnings growth. Dollar Tree is doing equally well right now. In each of the last two years, Dollar Tree has grown same-store sales by 2.4% and 3.4%.
Because of solid sales growth, both companies are pursuing an aggressive expansion strategy to keep growth going in the future. Dollar General opened 650 new stores last year and plans to open 700 additional stores in 2014. Dollar Tree opened 51 stores in the fourth quarter and intends to expand total square footage by 7% this year.
Compelling cash returns
Neither Dollar General nor Dollar Tree pays a dividend to shareholders, but that doesn't mean investors aren't getting their fair share of cash. Management teams of both companies prefer to reward shareholders in the form of share buybacks, which have effectively reduced share counts in both cases.
When employed effectively, meaning utilized to truly reduce shares outstanding instead of rewarding executives with option grants, share buybacks can be extremely valuable. That's the case when it comes to the share buyback programs for both Dollar General and Dollar Tree.
Dollar General spent more than $620 million repurchasing shares last year, and the results speak for themselves. Its diluted earnings per share clocked in at $3.17, which represents 43% growth in just two years.
At the end of fiscal 2014, Dollar Tree had 219 million shares outstanding. This is a 10% reduction in shares outstanding in just two years, from more than 242 million shares outstanding at the end of fiscal 2012. This was a primary contributor for diluted earnings per share increasing 35% in that time.
The Foolish takeaway
The aggressive share buyback strategy employed by both Dollar General and Dollar Tree have proven to be extremely accretive to shareholders. This is especially true now, since both stocks trade for relatively low valuations. Both stocks trade at or below 18 times earnings, which means that their share repurchases will be even more valuable to shareholders at such low valuations. This will help boost earnings per share even more going forward.
While overall economic growth remains tepid, dollar store chains are reaping the rewards. For better or worse, consumers are ratcheting down their spending habits, and are increasingly opting for dollar stores. If you're looking for stocks that demonstrate growth at a reasonable price, look no further than Dollar General and Dollar Tree.
Will the dollar stores ever pay dividends?
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Bob Ciura 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.