In the retail world, discount chains such as Family Dollar (NYSE:FDO), Fred's (NASDAQ:FRED), and Dollar Tree (NYSE:DLTR) look very similar. Sure, they stock different items and have other small differences, but ultimately, they all offer basic household products and other general merchandise at competitive discount prices in a no-frills format. When a consumer is on the lookout for laundry detergent, paper towels, and toothpaste, any of these chains will do just fine.
However, in the investing world, it is easier to examine each of these companies under a microscope and determine that while their stores may look similar, their financial statements sometimes do not. With $7.0 billion in 2003 revenues and nearly 7,000 units, Dollar General (NYSE:DG) is clearly the largest player. Family Dollar, its closest rival, raked in only $5.1 billion last year from around 5,400 stores.
Of course, biggest doesn't necessarily mean best, but it might in this case, at least with regard to the last few months. Dollar General's second-quarter results, released this morning, showed an 11.5% top-line improvement to $1.84 billion. Net income rose 19% to $71.3 million, or $0.22, from $59.9 million the year before. Earnings were favorably impacted, though, by a $0.03 adjustment associated with income-tax-related liabilities and related interest accruals.
Meanwhile, Dollar Tree posted a 12.5% jump in sales but managed only a 2.8% rise in net income. Revenues at 99 Cents Only Stores (NYSE:NDN) climbed 14.6%, but litigation expenses weighed heavily on earnings, which plummeted 82%. Family Dollar won't report earnings until next month, but it did recently release guidance forecasting flat growth for the quarter.
Where Dollar General truly shined was in same-store sales growth, which will become increasingly vital as these rapidly expanding chains will begin to see a smaller impact from expansion as they operate from a larger store base. Second-quarter comps at Dollar Tree and 99 Cent Stores fell 0.2% and 2.5%, respectively, while Dollar General's grew 3.2% higher. The company's July comps rose 3.6%, well ahead of Fred's 2.5%, and better than double the 1.4% monthly gain at Family Dollar.
Dollar General has also made the wise decision recently to accept payment via bank debit cards or Morgan Stanley's (NYSE:MWD) Discover cards, which at the very least will win back one customer. Last year, I vowed not to return until the firm accepted electronic payment after waiting in the checkout line for what seemed like hours with a baby in one hand and a full basket in the other, only to be turned away with about $1.17 cash in my pocket.
With most of these stocks trading near 52-week lows, Dollar General has led the pack. Given the pullback, and attractive (though toned-down) growth prospects, the sector as a whole is beginning to look a little more tempting, but don't be swayed by discounted prices alone. In the investing world, and retail world, you get what you pay for.
Like to stroll the aisles for more Fool coverage of the discounters? Put these in your cart:
- Dollar General May Be Back in Line and Family Dollar's Urban Shift, by Phil Wohl
- Dollar Tree Bucks Up, by Steven Mallas
- 99 Cents Off, by Alyce Lomax
Fool contributor Nathan Slaughter sometimes opts for less-expensive items, but never again for cheap trash bags. He owns none of the companies mentioned.
