Discount retailers can be pretty fun to shop at. After all, spending less money on life’s necessities means we have more money to plow into the stock market. And that’s a good thing. Recently, I went to Dollar Tree, Inc. (NASDAQ:DLTR) and bought a potato peeler for a dollar, at Target Corporation (NYSE:TGT) a peeler was at least seven bucks.
Understandably, the merchandise might not be as high quality as stores that don’t offer rock bottom prices. But in many instances it gets the job done just as well as more expensive items. As an investor, examining the discount merchandise phenomenon begs the question: Are the stocks as good of a value as the merchandise?
A southern discounter, and his name is Fred
Fred’s, Inc. (NASDAQ:FRED) operates 691 stores, primarily in the southwestern states. Not wanting to be crushed by the likes of Wal-Mart Stores, Inc. (NYSE:WMT), the company primarily focuses on small and medium sized towns. Going forward, the company will be aggressively trying to expand its pharmacy segment.
2012 was not a great year for Fred’s, Inc. (NASDAQ:FRED). While year-over-year sales were up 4%, net income decreased by 11%. The five year growth rate for EPS was 24.9%, but the same figure for sales is only 1.89%. If sales don’t start increasing, EPS growth will start to stall out.
Additionally, even for a discount retailer, Fred’s, Inc. (NASDAQ:FRED)’s has low margins. Combine that with the lowest ROE of any company I’ll be discussing in this article and you’ll find that Fred’s, Inc. (NASDAQ:FRED)’s is not a company you should be owning.
Commander of the discount army
Dollar General Corp. (NYSE:DG) is a bit more impressive than Fred’s, Inc. (NASDAQ:FRED)’s. In 2012, it recorded its 23rd straight year of consecutive same store sales growth. Dollar General Corp. (NYSE:DG) also focuses on small towns, with approximately 70% of its stores located in communities with less than 20,000 people.
Thanks to a 2010 acquisition, the company established a foothold in the Canadian dollar store market. Not everything costs just a dollar at its stores though. Almost everything is under $10 and about one-fourth of items are $1 or less.
Dollar General has performed well over these past five years. Sales and net income grew at compound annual growth rates of 11.8% and 47.2% respectively.
When the company reported its results for the first quarter, the outlook it gave for the rest of the year was rosy. It expects sales to increase 10%-11% year over year and same store sales to increase 4-5%.
The company plans to open 635 new stores this year, increasing its store count by 6.4%. Dollar General Corp. (NYSE:DG) has opened over 600 stores in each of the past three years and is not slowing down. As long as sales keep rising and debt doesn’t balloon out of control, that growth should be good for shareholders.