Fred's (FRED +0.00%) is a growing company with 701 discount general merchandise stores, including 346 full-service pharmacies, found in the Southeastern United Sates. Fred's primarily targets low-income, middle-income, and fixed-income consumers.
Investors love growth stories, especially if it's somewhat of an unknown prior to becoming a household name. While anything is possible for Fred's, this isn't a likely scenario. Though it might not sound as exciting, investing in Dollar Tree (DLTR 2.93%) or Family Dollar (FDO +0.00%) might be a better idea. But let's first take a look at Fred's.
Recent results
Fred's recently reported October comps and overall sales results. Total sales increased 2% to $143.4 million year over year. Comps increased 0.8%, versus a decline of 0.8% in the year-ago quarter. These numbers are positive, but they were on the lower end of guidance. Fred's attributed this to the combination of poor weather around Halloween and the budget crisis. On the other hand, Fred's has performed well in Hometown Auto & Hardware.
Looking ahead, Fred's expects its third-quarter earnings per share to increase by 5% to 10%. Looking further out to the holiday season, Fred's anticipates a very difficult environment. That isn't something you want to hear. Though it might seem subtle, throwing the word "very" in there makes it safe to assume that Fred's isn't likely to exceed expectations. The merchandising team at Fred's might lower inventories for the holiday season while simultaneously initiating an aggressive marketing program.
The true definition of a dollar store
Not all dollar stores sell all items for $1.00. But Dollar Tree does fit into that category. If you visit the company's website, you will see that it wants its customers to say, "I can't believe I just found this cool item at Dollar Tree!" And... "It's only $1."
I recently lived through this experience. After visiting my favorite pizza shop in a strip mall, I decided to enter a Dollar Tree. After perusing the book section, I found a Wall Street book, titled, "The Zeroes: My Misadventures in the Decade Wall Street Went Insane." It's written by Randall Lane, and he has done a masterful job so far -- I'm in the middle of it right now. Most importantly, I paid $1 for a book with a retail price of $27.95, and it's superb. So, in my opinion, Dollar Tree accurately markets what it offers.
Dollar Tree wants its shopping experience to be fun, somewhat like a treasure hunt. This is an interesting approach, because it leads to a broader targeting of consumers than other dollar stores, which mostly target low-income consumers. Dollar Tree also offers a broad product mix, including recognized and trusted brands at just $1.00. Who wouldn't be interested in that?
A different approach
If you walk into a Family Dollar store, you might find some items at $1.00, but not all. What you will find is that most items are $10 or less. Family Dollar is more about consistent promotions. By constantly changing its promotional offerings, customers will always check back to see what's being offered. This also leads to Family Dollar seeing what promotions are the most effective, so they can offer the same or similar promotions in the future.
Family Dollar is seeing steady growth in the Western United States, which has led to the opening of its 11th distribution center. It opened in Utah last month, and it will support the company's growth in the Western United States. This convenient location should also make the company's supply chain more efficient, which has the potential to aid the bottom line. Additionally, Family Dollar has increased its dividend for 37 consecutive quarters.
Discount store comparisons
If you're looking for growth, then consider top-line performance comparisons for these three companies over the past five years:
Source: Data by YCharts.
Now consider bottom-line comparisons:
Source: Data by YCharts.
Dollar Tree is the most impressive. However, Family Dollar yields 1.50%, whereas Dollar Tree doesn't offer any dividend.
The bottom line
If you're looking for an investment in a discount retailer, then you might want to check out Dollar Tree first. The company's broad product mix, marketing approach, and top and bottom line growth make it highly appealing. If you want dividend payments without sacrificing growth potential, then you might want to consider Family Dollar.
