It is not necessary that all dollar stores or similar small box retailers will survive in an environment where consumers are largely cost conscious. Some would fare well while others might sink. Typical examples of such companies are Dollar General (NYSE:DG) and Family Dollar Stores (FDO). Dollar General has been great soldier whereas Family Dollar continues to flop.
Comparison over the past...
Dollar General has been an impressive performer as compared to Family Dollar, when compared over the last five years. Its revenue has increased 48% over the period whereas Family Dollar’s revenue surged 40%. Both the retailers’ revenue growth was helped by same store sales growth and new store openings.
However, when net income is considered Dollar General has been a commendable player. Its bottom line has jumped a whopping 202% over the last five years, as the company managed to increase sales and control costs. But Family Dollar’s bottom line grew 52% only since it was unable to fight competitive pressures and increasing input prices.
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- DG 15-Year Financial Data
- The intrinsic value of DG
- Peter Lynch Chart of DG
The clear picture
The picture of the two players becomes even more clear when the recent quarter performance and the current situation is gauged. Dollar General recently posted its first quarter results. Though the numbers slightly missed on the expectations, it did please the investors and sent its shares soaring.
Its revenue jumped 6.8% over last year, clocking in at $4.52 billion. The increase was driven by new stores opened as well as same store sales growth of 1.5%. The retailer opened a total of 214 new stores during the quarter which boosted the top line. However, it missed the expectation mainly because of pressures such as stiff competition and severe weather conditions. The company could have done better if such problems were non-existent.
On the contrary, Family Dollar’s latest quarter witnessed 6% drop in its revenue and 4% decline in same store sales. The company is unable to attract customers and higher costs are weighing on its bottom line. Therefore, it plans to close 370 underperforming stores and slash prices in order to lure customers.
Dollar General’s earnings were in green with 9% surge to $0.72 per share. However, factors such as deep discounts and promotions to attract customers and sale of low margin products such as tobacco ate into its margins. Hence, its margins shrank 57 basis points to 30%, over the prior year’s quarter.
Moreover, the company reiterated its guidance and announced its plans to open 700 new stores during the fiscal 2014. It now expects the top line to grow between 8% and 9% along with same store sales growth of 3% to 4%. Also, earnings are expected to be in the range of $3.45 to $3.55 per share. This makes Dollar General’s future look bright.
Dollar General’s move to get into the consumables category was indeed a good one since sale of tobacco and perishables have led to higher revenue. However, it has hampered its margins slightly which should be taken care of by focussing on higher margin products. On the other hand, peer Family Dollar has been an underperformer with declining sales. It now plans to close its underperforming stores and restructure its business. Hence, Dollar General is a clear winner and should make your portfolio grow.