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Dollar General - Superior Position in the Market Makes It a Good Investment

April 18, 2014 | About:
jaggom

jaggom

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Despite a sluggish economy where most of the consumers are left with very little cash in their hands due to high payroll taxes, dollar store chains are growing at a good speed. They have performed well amid a tough recession and now they are moving forward to acquire more market share. Both Family Dollar (FDO) and Dollar General (DG) are worth watching in this space.

The Road Forward

In addition, these companies have strategically expanded speedily so as to cover more and more customers at their stores. As a result, one store is benefiting from the other and vice-versa in various forms.

It looks like cannibalization is working in favor of these companies, especially for Dollar Tree, which has performed comparatively well over the past few years. Nevertheless, the company’s results were below Wall Street’s expectations the last time.

Dollar Tree’s revenue was largely driven by a jump in retail selling square footage and increase in its comp stores. The yield in retail square footage was mainly resulted from inaugurating 117 new stores, expansing or relocating 19 stores, and closing down 6 stores during the quarter.

On the other hand, Dollar Tree’s gross margin increased. In spite of this advance in growth in both these fundamentals, the company failed to meet Wall Street expectations.

As far as the current fiscal 2014 is concerned, the company anticipates low single-digit growth in its comparable-store sales, and approximately 7% growth in its square footage. Dollar Tree has outlined private-label offerings to pump up its margins, along with prolonged frozen and refrigerated food stuffs in order to meet the surging demand for these items from its consumers across the region. This move will certainly help in revenue growth in the current quarter.

Expansion Moves

Family Dollar has subsequently learned from Dollar Tree and has built a strong relationship with McLane so as to improvize its assortment of products in the frozen and refrigerated food items to remain competitive in the market. However, Family Dollar had earlier declared 2% growth over its comparable-store sales, thus the company could not meet its own estimates on comps.

Going forward, Family Dollar has issued a weak guidance for the coming quarter based on the store traffic trends the company is currently witnessing.

Therefore, it expects its earnings to range from $0.65 to $0.75 per share for the first quarter. Further, it estimates its comparable-store sales to decline in the low single digits. Looking at its weak performance over most of Family Dollar’s segments, most of the analysts and market observers are gambling for a takeover of Family Dollar by its biggest rival, Dollar General.

The merger of these two would certainly generate the largest small box retailer in the region. Moreover, the combined operation of Family Dollar and Dollar General may throw a stiff and tough competition to drugstores across the U.S.

Looking into the details, Dollar General is the largest with a store count of 11,061 stores spread across 40 states. Furthermore, Dollar General is focused on opening around 700 new stores, and relocate or remodel approximately 525 stores across the U.S. due to continuously increase square footage growth of 6% to 7%. Thus, the company will remain competitive as Dollar Tree has also forecast 7% growth over its square footage.

Conclusion

Going forward, Dollar General can dominate the dollar store space as it is bigger. Moreover, the company experienced the best same-store sales growth in the last quarter and its revenue growth was strong. Also, it is expanding at a faster rate. Hence, Dollar General might be the best positioned of these retailers in the future and investors should consider choosing it over the other two.


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