According to Morningstar analyst Michael Keara, 40% of customers who visit dollar stores rely on some form of government assistance. The recession may be over, but one of its legacies – the popularity and growth of dollar stores – is here to stay.
However, the pace at which major dollar store chains – Family Dollar (UNKNOWN:FDO.DL), Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) – have been expanding during the past years has had some cannibalization effect which impacted same-store sales. One can find several dollar stores co-existing within a five-mile radius in many markets.
The impact of cannibalization can affect one or more players as far as their same-store sales, or comps, are concerned.
Family Dollar affected
This is exactly what one can see in the fourth-quarter report that Family Dollar posted this month. Comps stayed flat against the company's earlier expectation of 2% growth. This in itself was enough to cause a fall in share price. Family Dollar has posted the weakest year-to-date gains among the three dollar stores. It has also been trailing the Dow Jones Broadline Retail Index.
The nearly flat comps of Family Dollar were rather unimpressive in comparison with Dollar General's impressive same-store sales growth of 5.1% and Dollar Tree's 3.7% jump in their latest quarters. Family Dollar was clearly nowhere near its peers. However, not all is lost for Family Dollar. Remember, we are comparing this to comp gains of 10.5% in the year-ago quarter when Family Dollar had launched more than 1,000 items.
Family Dollar reported a 5.8% increase in revenue to clock $2.5 billion versus the year-ago quarter. The star performer was the consumables category with an 8.3% jump. Apparel was the worst performer which witnessed a decline of 4.9%. This, however, wasn't enough to beat consensus estimates of $2.57 billion. Earnings came in at $0.86 per share, up 14.7% from the year-ago quarter.
A few positives
Despite sales being pressured, Family Dollar had some positives to boast about. One was better-than-expected sales of refrigerated and frozen food for which it partnered with McLane. In addition, the average weekly sales per store increased.
Going forward, Family Dollar aims to add 200 more private-branded items in order to drive margins up. In addition, the consumables retail market is worth $800 billion in the U.S. and Family Dollar is focused on improving its presence there. Family Dollar plans to add 525 new stores in fiscal 2014 to grab a larger share in the consumables retail market space.
What Dollar General and Dollar Tree are up to
Family Dollar will have to be on its toes to grab share away from peers that have been doing well. Dollar General has performed well in the past and this momentum has carried over to 2013. In fiscal 2012, Dollar General registered record sales, operating profit, and net income and the trend remained the same in the second quarter of 2013. Its adjusted earnings per share increased 11.6% on the back of an 11.3% growth in net sales. The consumables category was the driving force behind the solid results that the company posted .
If we look at Dollar General's performance during the last three years, we find that it has consistently grown revenue and net profit. In addition, it has also reduced its debt on the back of strong free cash flow generation as shown in the chart below. For 2013, management expects same-store sales growth of 4% to 5% and total sales are expected to rise by 10% to 11% year over year .
Just like Family Dollar, Dollar General has been witnessing a boost in sales for several months now after adding tobacco products to its lineup. Demand has been strong for tobacco products, fresh food, candy and snacks. Higher traffic and an increase in the average transaction count led to 5.1% growth in comparable-store sales in the previous quarter, which was the strongest comps gain among the three.
Going ahead, Dollar General wants to keep the growth momentum intact. Hence, it plans to open 650 new stores which is up from 635 forecasted previously. In addition, it plans to remodel or relocate about 550 stores .
Compared to Dollar General and Family Dollar, Dollar Tree is the smallest dollar store. However, Dollar Tree is among the most successful single-price- point retailers in the U.S. Dollar Tree operates more than 4,842 stores across 48 states in the U.S. and five in Canada . In the second-quarter, it reported a 9.8% increase in earnings in comparison with the same quarter last year. The company also reported year-over-year revenue growth of 8.8% with total sales reaching $1.85 billion .
One of the challenges that Dollar Tree needs to address is optimizing its supply chain management. This involves the process of identifying a wider selection of core items that should always be in stock at all locations. Customers typically don't like to find fast moving items go out of stock in a day or two, as seems to be happening at many locations. If not handled properly, this could lead to a high attrition rate and fall in comps as consumers switch to other dollar stores or discount retailers.
Competition among the dollar stores is intense. As an investment, valuation does not favor Family Dollar. At a trailing P/E ratio of 18.28 Family Dollar isn't very cheap in comparison with Dollar General which trades at a ratio of 19.65 or Dollar Tree which trades at a ratio of 20.98.
In my opinion, investors should consider either Dollar General or Dollar Tree for an investment over Family Dollar. The first two dollar stores have been posting good growth numbers and have been expanding their store counts at a rapid pace.
Fool contributor Prabhat Sandheliya has no position in any stocks mentioned. The Motley Fool recommends Morningstar. 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.