Dollar General Corp. (DG), Dollar Tree, Inc. (DLTR): Which Dollar Stores are a Buy?

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In this article to assess the value present in dollar stores, I am using a formula of finding value that I present in my book. It is the first step of three in finding an investment, but will tell you if a stock is fairly valued, over-valued, or undervalued relative to the market.

What we are looking at is current value, not value relative to future earnings. In this case, we compare the growth of industry-leaders to the broader market.

Dollar General Corp. (NYSE:DG) provides up-to-date value information for the broader market, and will be used to find the averages. According to, the S&P 500 saw Q1 sales growth of 3.76%, trades at 1.51 times sales, and has a current P/E ratio of 19.1.

These three metrics are the ones that will be used, as each is universally important to valuing the market and a company both psychologically and fundamentally. On a side note, earnings growth can be used in place of sales growth, but when assessing economic growth I believe that sales is a better indication of overall improvements.

Looking at Dollar Stores

Dollar General Corp.(NYSE:DG) Family Dollar Stores, Inc. (NYSE:FDO) Dollar Tree, Inc. (NASDAQ:DLTR) Fred’s, Inc. (NASDAQ:FRED)
Q1 Sales Growth 0.50% 17% 8.3% 0.2%
Price/Sales Ratio 1.10 0.71 1.46 0.30
P/E Ratio 18.79 17.02 17.7 18.5

When you compare each of these four companies to the S&P 500, all with the exception of Fred’s and Dollar General posted better Q1 sales growth, and all of the four companies are cheaper in price/sales and P/E ratio compared to the S&P 500. Therefore, we can conclude that there is some level of value present within the industry as a whole.

As I look at these four companies as individuals, the only one that is immediately eliminated as the worst value is Dollar General Corp. (NYSE:DG). The company has the worst growth of the four and is the most expensive on a price/earnings basis.

Fred’s, Inc. (NASDAQ:FRED) is a very cheap stock – trading at five times below the S&P 500 average compared to sales. However, its lack of growth is a bit disheartening to me.

This leaves Family Dollar Stores, Inc. (NYSE:FDO) and Dollar Tree, Inc. (NASDAQ:DLTR) as the remaining options. Both have very strong growth that far exceeds the S&P 500 growth and are cheaper on a sales and earnings basis. At first glance, Family Dollar looks to be the clear winner between the two – as it had faster growth and is also cheaper on a price/sales basis.

One More Unnamed Metric In Retail

The exercise above allows us to see a general level of value relative to the S&P 500, and is a good starting point for retail investors. However, each industry has a niche, or a metric that is more important than in other industries. In retail, it is comparable store sales.

A retail company can easily grow its year-over-year sales by adding new stores. However, comparable store sales growth lets us know that new customers are coming in the doors of existing stores. Furthermore, as comparable store sales grow — margins also increase – and this can be more impactful to the performance of a retail stock over any other metric.

Company 2013 Expected Comparable Sales Growth
Dollar General 3%
Family Dollar 3-4%
Dollar Tree 2%
Fred’s (1%)

Looking at the chart above, my opinion remains intact. Fred’s, Inc. (NASDAQ:FRED) is seeing its traffic decline in its store, which should weigh on the fundamentals long-term.

Dollar General Corp. (NYSE:DG) does have strong comparable sales guidance, although with the company closing inefficient stores, total sales growth is minimal.

Therefore, I believe Family Dollar Stores, Inc. (NYSE:FDO) and Dollar Tree, Inc. (NASDAQ:DLTR) are without question, the strongest in the space.

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