3 discount retailers on sale now

The sector's biggest players are rallying behind a new strategy. Here's why they're a great addition to any value portfolio.

By StreetAuthority May 5, 2014 1:18PM
Manager Doris Oransky arranges merchandise at a Dollar General store in Arvada, Colorado on June 2, 2009 (© Rick Wilking/Newscom/Reuters)By Eric Winter

Despite new market highs and a rebound in corporate profits, post-recession job growth has been uneven at best. Falling unemployment numbers don't accurately depict the whole picture -- or even how dire the circumstances are for some families affected by joblessness.

Discount retailers have stepped up to meet the demands of consumers who might not be so well-to-do but still need to fill their cupboards without breaking the bank.

National chains such as Family Dollar (FDO), Dollar General (DG) and Dollar Tree (DLTR) have been aggressively expanding their presence across the country since 2008, looking to steal market share from the granddaddy of all discount stores, Wal-Mart (WMT).

Shopping at Wal-Mart has long been a comprehensive experience, supplying consumers with everything under one roof. However, discount retailers are now following suit, lining their shelves with an ever-growing catalogue of new offerings, the most promising being perishables (staples such as eggs and milk) and tobacco.

It remains to be seen whether these consumables will help dollar stores become true one-stop shops and edge out future trips to their larger counterparts.

Rising consumer confidence has kept the stock prices of this sector low. Are they at attractive levels for a long-term portfolio, or will Wal-Mart, bulk retailers and larger grocery store chains prevail? Let's look at the three biggest players.

Dollar Tree operates just shy of 5,000 stores in the U.S. and Canada under the Dollar Tree and Deal$ brands. The company reported growth in earnings and revenue for fiscal 2013 but fell short of analyst expectations.

Dollar Tree opened, expanded, or relocated 414 stores last fiscal year, representing 9% growth. Fiscal 2014 growth estimates are a bit more ambitious, with the chain looking to launch 450 projects across the U.S. and Canada. The consensus analyst estimate calls for the stock to gain 18% in the next year.

Dollar General operates more than 11,200 stores, making it the largest and longest-running discount retailer of this trio. DG seems to have the strongest position out of its peers, showing a 4.1% year-over-year increase in its most recent quarter, thanks to that all-important consumables category.

More impressively, Dollar General just wrapped its 24th consecutive year of same-store sales growth. The chain also opened 650 stores last year, with 700 more set to break ground this year. An aggressive share repurchase program amounting to $1.2 billion adds to the appeal of this player.

Family Dollar Stores has opened nearly 8,000 stores in the U.S., offering products to customers in the sub-$10 categories. The stock has lagged behind its peers DLTR and DG as well as the broader market over the past 12 months, posting a loss of 4%. Second- quarter earnings last month were disappointing and prompted the company to say it will close 370 stores.

However, FDO stands out from its peers in that it offers investors a dividend yield of 2.2%. Possessing the smallest market cap of these three discounters, many analysts see the stock as a potential takeover target, and record-low short-interest in FDO seems to corroborate this.

Risks to consider: Consumer spending and income has been in on the rise, pulling some shoppers out of the discount realm. The ability of retailers to retain foot traffic from the post-recession area (and attract more) while not burying themselves under rapid growth will be key.

Action to take:
A rise in perishable goods sales has been a boon for discount retailers lately, but will it lead to increased stock prices among the array of other options in this bull market? Dollar General is the standout winner for those looking to gain exposure to this industry for the long term. Family Dollar is a more speculative play that could lead to big gains assuming a takeover, but in my view, the risks outweigh the benefits.

Eric Winter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

More From StreetAuthority

May 5, 2014 6:26PM

"National chains such as Family Dollar, Dollar General and Dollar Tree have been aggressively expanding their presence across the country since 2008, looking to steal market share from the granddaddy of all discount stores, Wal-Mart."

The Four Horses of Trailer Trash Retail. These are worse than a viral STD. Add the bank Sweep product to it and you get leeches sucking the lifeblood out of our civilization. A reminder that Chinese manufacturers are closing down and emptying ancient cheap knock off goods from warehouses to meet our trash trinket and garbage demand in America. It may cost a buck... but if it undermines our economy, recovery, progress and prosperity, then it's a plague in need of cure and vanquish along with those who can't stop buying it.

May 5, 2014 10:31PM
If cheap plastic junk is what you are looking for, here's the places to get it. 
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