by Marc Bastow | June 12, 2012 10:58 am
A recent 100-mile trip into Delaware was punctuated by a sight I had not seen before: the beginning (and distressing) signs of a big-box store rising up along the rural roadside.
For the many years I’ve made the trip, the only stores I did spot seemingly every 20 miles or so were three of the country’s premier discount retailers: Dollar Tree (NASDAQ:DLTR), Dollar General (NYSE:DG) and Family Dollar Stores (NYSE:FDO).
All three have been in the news recently for hitting 52-week high stock prices in the midst of a fairly deep slump in the retailing sector in general.
These deep-discounters compete against Target (NYSE:TGT) and Wal-Mart (NYSE:WMT), among others, and while none of them currently come close to either chain in terms of sales or size, they’ve done pretty well for themselves.
These chains continue to climb the retailing ladder as slow wage growth, high unemployment levels and the rising price of consumer goods continues to hammer Americans and drive them in greater numbers to discount retailers.
Additionally, as I found on my travels, all thrive in local areas where a Target or Wal-Mart might not be found within a 25-mile radius. Instead, you’ll find them in smaller quarters, generally within a strip mall or perhaps alone in a small building next to a local hardware store.
Their message: We serve the local population, we do it fairly, and you won’t get lost in the miles of aisles of “stuff” or get distracted by those yellow falling prices on your head.
Investors would be wise to open their eyes as I did on my trip, and consider adding these discounters to their portfolios. Here’s a look at each one:
Dollar General started in 1939 in Goodlettsville, Tenn., and today operates as a discount retailer primarily in the southern, southwestern, midwestern and eastern United States through its 10,000 stores. It’s a supplier of virtually every commodity, including foodstuffs. Dollar General stores are fairly small, operating at around 7,000 square feet per unit, but that hasn’t stopped the company from a strong performance.
At $16 billion in market cap, Dollar General is the largest of this group. It racked up $15 billion in sales in 2011, with a net margin of 5% (pretty good for a squeezed margin business). Return on assets is at 8%, and return on equity is 18% — again both fairly good for the size of each store. With an operating cash flow of just over $1 billion, Dollar General has the ability to continue growing — and indeed, the company has shown historical revenue growth, earnings growth and a largely strong financial position with reasonable debt levels by most measures.
Chesapeake, Va.-based Dollar Tree is a discount store offering all items at a fixed price of $1 or less. Founded in 1986, the company operates 4,250 stores in 48 states and the District of Columbia, selling candy and food, health and beauty care products, paper and toys, among other goods.
Dollar Tree is worth about $12.3 billion, and it rang up $6.6 billion in sales in 2011, with net income coming in at $7.3 billion. DLTR has a solid 21% return on assets, 35% return on equity and operating cash flow of $665 million.
In late May, Dollar Tree’s board approved a two-for-one stock split effective June 26 for shareholders of record as of June 12, making DLTR shares — currently hovering around $100 — more accessible for retail investors. Consider buying in before the split — history says there’s a decent chance it will enjoy a small pop.
Family Dollar Stores was founded in 1959 and is headquartered in Matthews, N.C. The company is a self-service retail discount store, aimed primarily at low- and middle-income consumers, with 7,100 stores thoughout rural and urban areas of 45 states. Family Dollar offers most of the items its competitors do.
At $8 billion, FDO is the smallest of the group, and it does just a shade under $9 billion in sales. But don’t let those small numbers scare you away — Family Dollar’s return on assets is a healthy 13.7%, and return on equity is a robust 33.8%. FDO has to work a little harder to be more efficient, as its cash stash of $158 million leaves little room for error — with cash flow of just more than $500 million, the company should be commended for its nice RoA.
Family Dollar also is the only one of these stocks that pays a dividend, boasting a current yield of 1.2%.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.
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