Which Dollar Store Is a Worthy Investment?

Dollar Tree (NASDAQ: DLTR  ) , Dollar General (NYSE: DG  ) , and Family Dollar (NYSE: FDO  ) , the three prominent players in the dollar & variety stores industry, have capitalized on the recession by offering deep discounts to consumers. The industry's revenue is slated to increase from 2013 through 2018 , primarily supported by low-income households and complemented by price-conscious consumers in the higher income bracket.

In such conditions, let's take a closer look at the prospects of Dollar Tree and see how it compares to its peers.

What's Dollar Tree up to?
Dollar Tree started off fiscal 2014 on a solid note. Its first-quarter revenue increased 7.2% year-over-year to $2 billion . This was fueled by new store openings and comps growth of 2% versus the year-ago period. On the back of top-line growth, a healthy operating margin, and share buybacks, earnings per share increased 13.6% versus the year-ago quarter. The company returned $1 billion to shareholders through its repurchase program.

Dollar Tree is among the most successful single-price-point retailers in the U.S. It offers customers a balanced mix of consumable merchandise alongside assortments of high value seasonal and basic discretionary products at $1. Looking forward, the company is positioned for sustained growth and increased profitability due to its strategies.

The rapid expansion of Dollar Tree's footprint by opening new stores and relocating existing ones is key to sustaining the growth momentum. It opened 94 new stores, and relocated and expanded 28 existing stores in the previous quarter; this led to it ending the quarter with 5,080 stores . For the full fiscal year, it aims to open 375 new stores, in addition to relocating and expanding 75 stores for a total of 450 projects across the U.S. and Canada.

Dollar Tree believes that the Canadian market can support up to 1,000 Dollar Tree stores . This is in addition to the 7,000-store-potential for Dollar Tree in the United States. This presents a huge growth opportunity going forward.

Dollar Tree is focused on increasing store productivity as a part of its growth strategy. This includes category expansions to include wider assortments in candy, stationery, health, beauty, and eyewear, as well as home and household products. Moreover, in order to drive increased shopping frequency, the company continues to expand the frozen and refrigerated category that is now available in 3,269 stores .

The company's e-commerce channel, Dollar Tree Direct, is expanding rapidly. With a 50% increase in product assortment, traffic in the previous quarter increased 19% versus the year-ago period. As part of sales promotion and marketing, the company is also reintroducing its "See What $20 Buys" and "Stretch Your Dollar" campaigns through in-store promotions and digital media.

Analyzing the competition
Even Dollar General's fiscal 2014 started on a good note. Its first-quarter sales increased 6.8% on the back of 1.5% comps growth and new store openings. Both customer traffic and average ticket increased for the 25th consecutive quarter . Earnings per share came in at $0.72.

Looking forward, Dollar General expects sales for 2014 to increase 8% to 9%. Overall square footage is expected to grow about 6% to 7% with the addition of about 450 stores. Same-store sales are expected to increase 3% to 4%. Diluted earnings per share for the fiscal year are expected to be in the range of $3.45 to $3.55. Like Dollar Tree, Dollar General is committed to the philosophy of providing everyday low prices to drive traffic.

While Dollar Tree and Dollar General posted impressive results despite the impact of a harsh winter weather, Family Dollar is in troubled waters. The company's second-quarter results were dismal, and management blamed the harsh weather conditions.

The company posted a 6.1% year-over-year decrease in sales. Earnings per share came in at $0.80 per share , representing a whopping 34% decline versus the year-ago quarter. For Family Dollar, the last few quarters have been challenging; this shows that its strategies aren't yielding the desired results.

Going forward, it will be shuttering 370 underperforming stores and also slowing down square footage growth beginning in fiscal 2015. While Family Dollar attempts to correct its course, one can expect a few more weak quarters ahead.

The bottom line
Dollar Tree's store expansion, e-commerce initiatives, and category additions look impressive. The company is trying its best to address customers' needs in a difficult economic environment, and this should help it sustain its robust performance going forward.

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