GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

4 Discount Retail Stocks to Consider Now

In recent years extreme discount stores have flourished and have been able to take market share from traditional discount stores and department stores. The extreme discount retailers have been able to take advantage of a tight economy, which has served to make consumers extremely price conscious. Extreme discount retailers like Dollar Tree, Family Dollar and Dollar General have all grown earnings and have seen an increase in their stock prices. This article will analyze four discount chain store operators to see if their stocks have the potential to move higher.

Dollar Tree (DLTR) has a market cap of $10.89 billion and a price to earnings ratio of 23.37. The stock has traded in a 52-week range between $53.17 and $94.47. The stock is currently trading near the top of its 52-week trading range at around $94. The company reported fourth quarter revenues for the period ending on January 28, in the amount of $1.9 billion compared to revenues of $1.7 billion in the fourth quarter of 2010. Fourth quarter net income was $188 million compared to net income of $162 million in the fourth quarter of 2010.

One of Dollar Tree’s competitors is Wal-Mart Stores Inc. (WMT). Wal-Mart is currently trading around $61 with a market cap of $207.6 billion and a price to earnings ratio of 13.4. Wal-Mart pays a dividend which yields 2.6% versus Dollar Tree which does not pay a dividend.

Dollar Tree runs discount variety stores in the U.S. and Canada. Its stores sell merchandise for a price of $1.00 or less. The company increased fourth quarter year-over-year revenues by 11% and net income by 16%. Dollar Tree currently has 4,351 stores and in 2011 those stores comparable same store sales were up by 7.3%. The company plans to open 315 new stores in 2012. The new stores will offer frozen and refrigerated products which will significantly improve overall store traffic. The company’s CFO Kevin Wampler is “forecasting sales in the range of $1.65 billion to $1.69 billion and diluted EPS in the range of $0.91 to $0.97, which would represent an 11% to 18% increase compared to the first quarter of 2011 earnings of $0.82 per diluted share.”

Investors appreciate Dollar Tree’s earnings potential and have pushed the stock price up by 75.6% over the last 52 weeks. As a result of the stock's 52-week appreciation its valuations (price to earnings ratio 23.3, price to book ratio 8.1) are unusually high for a retail store, which could deter new investors. Potential investors should do further research.

Family Dollar (FDO) has a market cap of $6.71 billion with a price to earnings ratio of 17.6. The stock has traded in a 52 week range between $44.42 and $60.53. The stock is currently trading around $57. The company reported first quarter revenues for the period ending on November 26, the amount of $2.1 billion compared to revenues of $2 billion in the first quarter of 2011. First quarter net income was $80 million compared to net income of $74 million in the first quarter of 2011.

One of Family Dollar’s competitors is Target Corporation (TGT). Target is currently trading around $58 with a market cap of $38.7 billion and a price to earnings ratio of 13.5. Target pays a dividend which yields 2.1% versus Family dollar whose dividend yields 1.5%.

Family Dollar operates a chain of about 7,000 low cost retail stores. The company increased year-over-year first quarter revenues by 5% and net income by 8%. Many consumers find Family Dollar’s lower price points attractive, which is why the store has been able to take market share from retailers like Wal-Mart and Target. Extreme value stores like Family Dollar also have a competitive advantage because they can typically sell small or single use items at higher profit margins than value stores like Wal-Mart or Target. Family Dollar will report second quarter earnings on March 28. It is expected that the company will report second quarter revenues of $2.46 billion which will be an 8.8% increase from 2011. The company’s earnings per share are expected to be $1.13 which will be a 15.3% increase from the second quarter of 2011. Family Dollar's stock price has increased by 9% over the last 52 weeks, and if the company reports strong second quarter earnings the stock is priced to move higher. Potential investors should do further research.

Dollar General (DG) has a market cap of $2 billion with a price to earnings ratio of 34.05. The stock has traded in a 52-week range between $29.84 and $45.78. The stock is currently trading near the top of its 52-week trading range at around $45. The company reported third quarter revenues for the period ending on October 28, in the amount of $3.6 billion compared to revenues of $3.2 billion in the third quarter of 2010. Third quarter net income was $171 million compared to net income of $128 million in the third quarter of 2010.

One of Dollar General’s competitors is PriceSmart Inc. (PSMT). PriceSmart is currently trading around $69 with a market cap of $2 billion and a price to earnings ratio of 34.05. PriceSmart currently pays a dividend which yields 0.9% versus Dollar General which does not pay a dividend.

Dollar General operates a chain of approximately 9,800 stores in 38 states. The company increased year-over-year third quarter revenues by 12% and net income by 33%. The company will report fourth quarter earnings on March 22 and is expected to report earnings of $0.82 per share. If the company does earn $0.82 per share that will be a 26% increase from the fourth quarter of 2011. Dollar General is the largest of the extreme discount store and has been able to use its buying power to gain higher margins (gross margin 31.7%, operating margin 10%) than its competitors. Investors have been impressed by Dollar General's consistent growth and have bid up the stock price by 43% over the last 52 weeks. On March 15, CNBC stock analyst Jim Cramer said that “Dollar General (DG) is benefiting from the consumer trade down;” however, Cramer prefers Dollar Tree (DLTR). Dollar General’s stock has not performed as well as Dollar Tree’s but its valuation (price to book ratio 3.3) is lower. Potential investors should do further research.

Big Lots (BIG) has a market cap of $2.9 billion with a price to earnings ratio of 15.24. The stock has traded in a 52 week range between $28.89 and $45.90. The stock is currently trading near the top of its 52-week trading range at around $46. The company reported fourth quarter revenues for the period ending on January 28 in the amount of $1.6 billion compared to revenues of $1.5 billion in the fourth quarter of 2011. Fourth quarter net income was $114 million compared to net income of $110 million in the fourth quarter of 2010.

One of Big Lots' competitors is Costco (COST). Costco is currently trading around $91 with a market cap of $39.3 billion and a price to earnings ratio of 26.4. Costco pays a dividend which yields 1.1% versus Big Lots which does not pay a dividend.

Big Lots operates 1,451 BIG LOTS stores in the United States, and 82 LIQUIDATION WORLD and LW stores in Canada. The company increased year-over-year fourth quarter revenues by 6% and net income by 3%. For the fiscal year ending on January 28, year-over-year revenues increased by 6% and net income increased by 7%.

In the March 2 fourth quarter earnings call the company’s CFO Joe Cooper gave 2012 earnings predictions. He predicted that “fiscal 2012 adjusted income from continuing operations to be in the range of $3.40 to $3.50 per diluted share compared to income from continuing operations of $2.99 per diluted share in fiscal 2011.”

If Mr. Cooper’s earnings projections are correct the company’s 2012 earnings would be higher by between 13 to 17 percent. The company’s earnings per share calculation take into account the company’s significant share repurchase program. In 2011 the company repurchased 11 million shares at a cost of $359 million. The company has authorized an additional $99 million for 2012 share repurchases. Big Lots stock price has increased by 4.7% over the last 52 weeks and by 6% since the March 12 earnings announcement. Potential investors should do further research.

About the author:

StockCroc
I'm mostly interested in income investing using dividends, preferred stocks and other debt instruments, and pair trading.

I fundamentally analyze every business from the top down.

In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.

Visit StockCroc's Website


Rating: 4.3/5 (7 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK