Dollar for Dollar, Dollar Tree Still Rules

by Ethan Roberts | November 19, 2012 9:34 am

With the U.S. economy continuing to struggle, shoppers — especially around Christmas time — are apt to seek out bargains for their everyday and holiday needs. That’s why so many people these days have forsaken traditional retailers such as Wal-Mart (NYSE:WMT[1]) or Target (NYSE:TGT[2]) for one of the deep-discount dollar stores.

The dollar store has become a huge business in both the U.S. and Canada. Dollar General (NYSE:DG[3]), has 10,000 stores, Family Dollar Stores (NYSE:FDO[4]) has over 7,000 stores and Dollar Tree (NASDAQ:DLTR[5]) has 4,520 stores.

Dollar Tree is the only one in which every item is truly priced at only $1. The other two have some items for a buck, but many others others are much higher in cost. That means Dollar Tree is the true niche retailer of the three, while the other two are more like low-priced Wal-Marts.

For that reason, despite having Dollar Tree having fewest number of stores of the group, I’ve always favored it as having the superior business model. In addition, it seems to me that DLTR’s stores have wider aisles with far better organization of merchandise and more eye appeal than the others.

Stock Performance

From November 13, 2009 (DG’s first day of trading) until June 26, 2012, Dollar Tree’s stock absolutely trounced the other two dollar stores. Here’s a table showing their prices and gains over that time (adjusted for splits and dividends):

DLTR $16.36 $110.98 578%
FDO $28.36 $70.29 147%
DG $22.73 $54.95 141%

As you can see, all three stocks performed admirably over this time frame. However, DLTR’s 578% gain was really extraordinary and scorched the 103% gain of the S&P 500 during that same period.

The following day, June 27, Dollar Tree did a 2-for-1 stock split, in which the new adjusted price became $55.49. However, as sometimes happens with splits, the stock price began to weaken immediately thereafter, as investors become alarmed by the increased supply of shares.

Then on Oct. 11, the stock gapped down 8% on heavy volume of over 16 million shares when Dollar Tree said its third-quarter sales would come in near the low end of its prior guidance from August. Wall Street expected $1.75 billion, but all Dollar Tree could promise was $1.71 billion!

The company blamed its lower guidance on higher gasoline prices, cautious consumer spending and a change in the calendar year, with two days of pre-Halloween sales coming in the fourth quarter, rather than the third.

However, the Street wasn’t buying it, and the following day DLTR fell another 5%. It was apparent that many investors, perhaps nervous with a price-earnings ratio approaching the mid 20s, decided it was time to take some profits.

Interestingly, while Dollar Tree was making excuses and getting pummeled, investors were much kinder to the competition, and FDO hardly felt a twinge. The following table shows the stock prices of all three since the day Dollar Tree’s stock split:

STOCK PRICE 6/27/2012 PRICE 11/16/2012 RETURN
FDO $68.90 $66.54 (3.4%)
DG $54.02 $48.70 (9.8%)
DLTR $53.48 $38.82 (27.4%)

It’s worth noting that 17% of the total 27% of DLTR’s loss has come since the Oct. 11 announcement.

Looking Ahead

Investors have two ways to view the dollar stores when economic times get tough. We can echo Dollar Tree’s sentiments that higher gas prices and a tough economy make consumers cautious. However, another view — and one I prefer — is that tough times draw more people to the dollar stores in an effort to find even better bargains than Wal-Mart and Target offer.

The question is: Once consumers are in the store, will they put fewer items in their carts, such as the impulse items near the cash register that prop up sales for these stores?

With Christmas approaching, all three dollar stores should do well over the next quarter. Yet despite its recent problems, I still favor Dollar Tree over Family Dollar and Dollar General for the long run. Dollar Tree’s sales have grown at over 10% per year since 2007, and its net income has increased by almost 20% per year. In addition, it has much more cash on hand ($486 million) than debt ($250 million).

Right now, with DLTR’s P/E back down to a workable 15 (both FDO and DG have an 18 P/E), and its stock 27% lower than its post-split price, I’m once again a Dollar Tree believer.

As of this writing, Ethan Roberts didn’t not own any securities mentioned here.

  1. WMT:
  2. TGT:
  3. DG:
  4. FDO:
  5. DLTR:

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