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Dollar Tree, Inc. (DLTR), Dollar General Corp. (DG) & Family Dollar Stores, Inc. (FDO): What Do the Earnings of Discount Stores Reveal?

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Dollar Tree Inc (DLTR)The discount retailer Dollar Tree, Inc. (NASDAQ:DLTR) looks more attractive after it reported solid results as the company has effectively maneuvered itself through challenging business conditions.  On the other hand, earlier this month, its rival Dollar General Corp. (NYSE:DG released its first quarter earnings that met the market’s expectations. But the company lowered its guidance causing a considerable drop in its shares. Unfavorable weather, intense competition, increasing sales of consumables and lower margin goods is having a negative effect on its profitability.

Dollar General Corp. (NYSE:DG)’s revenues increased by 8.5% to $4.23 billion , slightly below analysts’ expectations of $4.24 billion. Same store sales rose by 2.6% on the back of an increase in the number of average transactions and higher customer traffic. Net income rose by 3.1% to $220 million or $0.67 per share which translates into adjusted earnings of $0.71 per share, in-line with the analysts estimate.

The revenue growth was led by consumables, which contributed more than 70% to its revenues. Here, Dollar General Corp. (NYSE:DG) witnessed a double digit growth in sales but lacklustre performance of other segments shows that the low income shoppers are struggling; there is financial pressure on consumers who have increased their purchases of consumables while sales of non-essential items continues to suffer. An increase in “shrink” or theft, coupled with the increase in items priced at more than $5 has also hit its bottom-line.

Category 2013 2012 % Change
Consumables $2,877 $3,195 11.00%
Seasonal $525 $529 0.90%
Home Products $259 $266 2.60%
Apparel $240 $244 1.40%

Dollar Tree Takes the Lead

Dollar General’s rival Dollar Tree, Inc. (NASDAQ:DLTR) has reported impressive results for its most recent quarter. The company saw its revenues growing by 8.3% to $1.87 billion while Its net income increased 15% to $133.5 million or $0.59 per share. Comparable sale increased by 2.1% in the quarter. The growth in revenue is partly attributed to stronger performance of its discretionary unit as compared to consumables.

While Dollar General Corp. (NYSE:DG) and Dollar Tree have reported similar top line growth rates, their competitor Family Dollar Stores, Inc. (NYSE:FDO) reported an 18% increase in sales.

Qtr Revenue (In Millions) 2012 2013 Change
Dollar General $3,901.20 $4,233.73 +8.5%
Dollar Tree $1,723.60 $1,865.80 +8.3%
Family Dollar $2,458.63 $2,893.99 +17.7%
Qtr Net Income (In Millions)
Dollar General $214.42 $220.08 +2.6%
Dollar Tree $116.10 $133.50 +15.0%
Family Dollar $136.42 $140.15 +2.7%
Gross Profit Margin
Dollar General 31.48% 30.59% -90 basis points
Dollar Tree 35.00% 35.20% +20 basis points
Family Dollar 34.87% 33.42% -150 basis points

The comparable quarterly performance of the three is presented in the table above. Dollar Tree, Inc. (NASDAQ:DLTR) has reported the largest increase in net income from the same quarter last year and it is the only one, out of the three, whose gross profit margin has risen. For Dollar General Corp. (NYSE:DG) and Family Dollar Stores, Inc. (NYSE:FDO), the drop in profit margin is due to increase in sales of lower margin consumables. Moreover, the two are also adding other lower margin products, such as Tobacco, to their shelves which is driving down the profitability. I expect this trend to continue in the future as well, partly due to increasing competition from Wal-Mart, which is discussed later.

Saturation Point

The dollar stores are adding hundreds of new stores across the nation while their larger rivals, particularly Wal-Mart, are also taking similar measures through smaller outlets. In this competitive environment, this strategy is the key towards improving, or even maintaining the market share.

Dollar General opened 165 new stores in quarter and that took the total store count to 10662. Meanwhile, Family Dollar Stores, Inc. (NYSE:FDO), to keep pace with its competitor, opened 126 new stores taking its total count to 7675. Similarly Dollar Tree, Inc. (NASDAQ:DLTR), which operates larger stores in terms of covered area as compared to Dollar General Corp. (NYSE:DG) and Family Dollar, opened 94 new stores and  its total store count reached 4763. Naturally, the aggressive expansion plans cannot go on forever and the market will eventually hit the saturation point.

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