Dollar Tree, Inc. (DLTR): Will Dollar General Corp. (DG) Make Investors ‘Fistfuls of Dollars’?

Strategic Expansions

Looking ahead, Dollar General, which operates 10,500 stores in the United States, intends to match last year’s addition of 625 new stores to continue growing. The company has a stated goal of increasing its square footage by 7%, in line with its growth rate over the last two years.

The company intends to strategically expand into lower income neighborhoods, since those shoppers are less likely to drive farther for groceries if gasoline prices rise. Avondale Partners analyst Mark Montagna notes that according to his firm’s research, prices of the same items are “exactly comparable” to those from Wal-Mart, so the choice comes down to which store is within a closer driving distance. Therefore, the strategic placement of stores in relation to Wal-Mart, Target or Costco Wholesale Corporation (NASDAQ:COST) stores is of paramount importance.

In addition, the company intends to add Dollar General Corp. (NYSE:DG) Market to its locations, a larger store that also offers fresh fruit, vegetables and meat. These new stores will likely perform well, since customers are more likely to eat at home in times of decreased discretionary spending. This strategy will also help Dollar General to slowly evolve from a thrift store into a full supermarket.

Guidance

As a result of these new growth initiatives, Dollar General expects to have a fairly rosy fiscal 2013, with earnings of $3.15 to $3.30 per share, in line with the consensus estimate of $3.27 per share.

Revenue is expected to rise 10% to 12%, compared to a full year gain of 8.2% in fiscal 2012. Same-store sales are expected to rise 4% to 6%, roughly in line with its full-year gain of 4.7%. The company expects to post slower growth in the first half of 2013, with growth picking up in the second half of the year, as the immediate effects of tax hikes diminish.

Versus Competitors & Bottom Line

Let’s see how Dollar General stacks up to its rivals Family Dollar and Dollar Tree, Inc. (NASDAQ:DLTR) Stores, as well as superstore Wal-Mart, on a fundamental basis.

Forward P/E Price to Sales (ttm) Return on Equity (ttm) Debt to Equity Profit Margin Qty. EPS Growth (y-o-y) Qty. Revenue

Growth (y-o-y)

Dollar General 15.76 1.05 19.98% 64.03 5.80% 21.30% 10.30%
Family Dollar 13.53 0.73 33.77% 53.63 4.40% -0.10% 12.70%
Dollar Tree Stores 14.97 1.43 21.70% 16.27 8.38% 21.70% 15.40%
Wal-Mart 12.73 0.53 22.42% 65.81 3.62% 8.60% 3.90%
Advantage Wal-Mart Wal-Mart Family Dollar Dollar Tree Stores Dollar Tree Stores Dollar Tree Stores Dollar Tree Stores

Source: Yahoo! Finance, 3/26/2013

While Wal-Mart is the cheapest stock fundamentally, it is absolutely dominated by dollar stores in other growth categories. Out of the three dollar stores, Dollar Tree, Inc. (NASDAQ:DLTR) is the strongest fundamentally, with the lowest debt, strongest profit margins and most robust top and bottom line growth. Dollar General Corp. (NYSE:DG) comes in at a close second in most categories except for its higher debt, and Family Dollar is the weakest, with negative earnings growth and the slimmest margins.

In my opinion, the numbers speak for themselves – investing in dollar stores is a viable alternative to massive superstores like Wal-Mart. With a more flexible business model, strong past performance during economic downturns, a keen eye for strategic expansions and aggressive initiatives to match Wal-Mart’s prices dollar for dollar, I’d say that Dollar General and its industry peers are worthy investments.

The article Will Dollar General Make Investors ‘Fistfuls of Dollars’? originally appeared on Fool.com and is written by Leo Sun.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.