Dollar General Corp. (DG), Family Dollar Stores, Inc. (FDO), Dollar Tree, Inc. (DLTR): Dollar Stores Are Still Good for a Few Dollars

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Going forward, a management with an outstanding track record (which is, for this writer, the firm´s strongest feature) should continue to deliver great results. With a limited store base and plenty of room for expansion, the future looks promising. Moreover, the productivity of new stores has been coming in higher than that of existing locations.

International markets provide plenty of expansion opportunities as well, especially in Canada and Latin America. Strong first quarter results prove that the firm’s growth initiatives and cost efficiencies are, and should continue to be, quite fruitful.

Still looking good

Family Dollar Stores, Inc. (NYSE:FDO) is the smallest of these firms in terms of market cap, at roughly $7.3 billion. Expected to deliver an average annual earnings-per-share growth rate in line with the industry average at 12% to 13%, the company trades at 16.7 times consensus estimates, a 28% discount to its peers’ averages. I’d recommend buying and holding on to this stock. Just like its competitors, its business seems quite far from capped, and comps are expected to continue to rise for a few more years still.

Going forward, several initiatives including the roll-out of tobacco, an aggressive remodeling campaign and a distribution agreement with McLane coupled with plenty of room available for store base expansion should drive revenue to new heights. Furthermore, a wide gap between Family Dollar Stores, Inc. (NYSE:FDO) and Dollar General Corp. (NYSE:DG) in terms of earnings per share provides plenty of space for evolution while a new management with critical experience in the sector should help the firm narrow it. The launch of wine and beer sales is another foreseeable initiative in the near future that could contribute to the company´s sales.

The company will also yield about 1.69% in the form of dividends in addition to continued share repurchases, returning value to investors while offering above-average margins and returns. The company also has healthy debt-to-cash levels (see table below), so stockholders should rest easy.

Family Dollar Industry Avg.
Operating Margin % TTM 6.8 5.8
Net Margin % TTM 4.2 3.4
ROA TTM 13.4 8.0
ROE TTM 35.7 20.8
Debt/Equity 0.4 0.7

Source: Morningstar

Bottom line

Although the economy is recuperating slowly, dollar stores do not seem to be losing the customers they won during the recession. Their target demographics continue to be cash-strapped or have become accustomed to the dollar store concept, finding it more comfortable and cheaper than other existing retail channels. With plenty of expansion opportunities ahead in the U.S. and international markets, I’d recommend that you consider adding these three stocks to your portfolio. Although my number one pick would be DollarTree, all three comprise very promising investments.

The article Dollar Stores Are Still Good for a Few Dollars originally appeared on Fool.com and is written by Damian Illia.

Damian Illia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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