It's a bold claim to say Dollar Tree (DLTR +2.22%) is the better deep discount investment, especially when its performance has come in fits and starts, and rival Dollar General (DG +0.47%) has been like a machine chugging along without issue.
Yet the market has priced these differences into their stocks, and Dollar Tree now looks like the winning play. Here's why.
Image source: Getty Images.
Finally walking in lockstep
Granted, the big spike Dollar Tree stock enjoyed after the release of its fiscal third-quarter earnings report on Nov. 24 seems a bit overblown. Though the retailer posted one of its best quarters in ages, it still needs to prove the performance is repeatable.
What's most encouraging is the fact both the Dollar Tree and Family Dollar banners are finally on the same page. The former was previously carrying the bulk of the business as the latter went through a painful turnaround that dragged down the company as a whole.
During that period, rival Dollar General was able to pull away. It has logged 30 consecutive years of comparable-store sales growth, and it looks like the company will add another in 2020. Dollar Tree's track record has been much more spotty.
Yet the third quarter saw Family Dollar post 6.4% comps growth, while Dollar Tree reported 4.0% growth, which spurred investors to bid up the stock.
More selection available
Holding a lot of promise is Dollar Tree's expansion of its multiple price point experiment. Long the only pure-play dollar store concept, the deep discount specialist began testing slightly higher prices last year -- up to $5 -- and just announced it will roll out the program to 500 stores in the spring.
Consumers seem to be responding well to the idea as it allows Dollar Tree to offer more products and more brand names at only slightly higher prices. Because it was becoming difficult to keep giving consumers the quality and depth of offerings they were looking for at the $1 price point, the new program helps alleviate that shortcoming in the store experience.
It's arguably one of the major advantages Dollar General has had over Dollar Tree as the former was not beholden to that price threshold. Dollar Tree isn't entirely abandoning the $1 concept that has served it so well --the company is placing higher-priced goods in a dedicated section of its stores called Dollar Tree Plus. Still, the program enables the retailer to bring more value and selection to its customers.
Moving online
This won't put Dollar Tree on an even footing with Dollar General, but it's the growth potential that makes it an attractive investment now, along with its efforts in e-commerce and delivery.
Recently, Dollar Tree committed to hiring 25,000 people for the holiday season, but unlike in prior years, most of them would be going to the company's distribution centers. While that still means the retailer is focused on getting product to its stores quickly, it also shows the growing importance the retailer is placing on its "buy online, pickup in store" program.
The initiative is still in the early innings, but with consumers doing more shopping online, it's essential to have a digital presence, even for a dollar store where margins are a lot tighter than at a mass merchandiser.
Dollar Tree has also experimented with home delivery through Instacart and Shipt, and long term, this option could pay off for the company. Investors should closely track these efforts as management has promised to provide updates in future earnings calls.
Discounting the discounters
As for valuation, on a price-to-earnings basis, Dollar Tree may look more expensive than Dollar General. But on a range of other metrics, Dollar Tree is the cheaper stock that offers greater value to investors than its retail rival.
| Metric | Dollar Tree | Dollar General |
|---|---|---|
| Price to earnings | 27.6 | 23.6 |
| Forward price to earnings | 18.1 | 22.2 |
| Price to sales | 1.1 | 1.7 |
| Price to book value | 3.8 | 7.4 |
| Price to free cash flow | 10.3 | 19.6 |
Data source: FinViz.com. Table by author.
Dollar General has been the top discount retailer stock pick in the past as it far outperformed Dollar Tree over the last three-, five-, and 10-year periods. And while I don't expect it to collapse and turn into a losing investment, Dollar Tree has turned a corner and shows greater growth potential going forward.
