U.S. consumer spending has been increasing, but at a very slow pace. Although the unemployment rate has been decreasing, people continue to be cautious about their spending and they are very sensitive to price increases. It has been estimated that the upcoming fall season will not see a lot of footfall this year since customers are not expected to splurge . Hence, dollar stores that offer daily requirements at low prices will continue to be important.
The economic slowdown was the biggest opportunity for dollar stores when people started visiting these stores in order to spend each penny judiciously. Companies such as Dollar Tree (DLTR +2.65%), Dollar General (DG +1.37%), and Family Dollar Stores (FDO +0.00%) witnessed an increase in footfall, which led to higher revenue.
The past
Each player has tried to attract the biggest crowd possible by offering the maximum discounts and the lowest prices. Not only did these companies benefit, but so too did their investors as the companies provided great returns.
Each player's stock price appreciation in the last five years is indicated in the chart below:
Dollar Tree has been the best performer compared to its peers, providing the highest return of 245.1%. Family Dollar and Dollar General also performed well, with returns of 149.6% and 147.9%, respectively. Dollar Tree has been focusing on providing refrigerated and frozen foods and the company has installed coolers in many stores so that it can increase its top line further.
The present
Although Dollar General has provided the lowest returns over the last five years, things have been turning in its favor. The company's strategies have been paying off, leading to improved performance in the last year. Dollar General has been able to outperform Family Dollar over the last few months, as reflected in the chart below:
Dollar General's stock price has increased 27.8% since the beginning of the year, whereas Family Dollar's stock price is up by only 9.5%. However, Dollar Tree continues to lead the pack with stock price appreciation of 42.7%.
Dollar General has been performing very well. In its recently-ended quarter it reported same store sales growth of 5.1%, much higher than Dollar Tree, which posted 3.7% growth, and Family Dollar Stores, which reported 2.9% growth.
One of the key drivers for Dollar General's performance is the addition of tobacco to its offerings, which is luring more customers to its stores. Moreover, the company announced that people who come to buy tobacco end up buying some other products as well, which adds to its top line. Additionally, the company has already opened 375 new stores in the first half of the year, and plans to open a total of 650 new stores during the fiscal year.
The future
Dollar General has the lowest P/E ratio, on a trailing twelve month basis, of 19.37. Dollar Tree and Family Dollar have multiples of 20.45 and 20.36, respectively. Dollar General is cheaper than its peers even when the forward P/E ratio is considered. The forward P/E multiple is 15.44 for Dollar General, lower than Dollar Tree at 17.33 and Family Dollar at 17.88.
The PEG ratio of these three players strengthens the belief that Dollar General is cheaper compared to its peers. Dollar Tree and Family Dollar have PEG ratios of 1.22 and 1.75, respectively, whereas Dollar General's is quite low at 1.16. Hence, investing in Dollar General will be cheaper for the same amount of earnings growth.
Takeaway
Dollar General looks increasingly attractive, with higher same store sales growth than its peers. Its expansionary initiatives, store remodeling, and the addition of fresh food and tobacco will add to its growth. Moreover, Dollar General is cheaper than its peers and it is expected to grow the most. Investors should definitely invest in this dollar store in order to get great returns.
