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Dollar Store Report Card: DG, DLTR, FDO

DLTR still rules supreme among dollar stores, but the sector as a whole is weak

For years, I’ve been proclaiming Dollar Tree (DLTR) the top dog among the three major dollar store stocks, handily trouncing rivals Dollar General (DG) and Family Dollar Stores (FDO) in relative strength.

dollar store stocks DLTR DG FDODollar Tree stores are well organized, with wide aisles and neatly stacked display items. The staff is usually friendly, and the stores are well lit. By contrast, from my experience, a walk through Dollar General or Family Dollar is a bit more treacherous. The aisles are narrow, and there’s a better than even chance you could trip over some boxes that are blocking an aisle, or dance around some cluttered items that have fallen on the floors. Additionally, the staff often seems to be indifferent to the customer in these stores.

But what has set DLTR apart from the competition all of these years is that it is the only true dollar store (i.e.m everything in the store is only a buck). The same dollar item in Dollar Tree might cost you $3.99 in Dollar General or Family Dollar.

But what makes a good business doesn’t necessarily make a good stock. So before you and I pass final judgment on DLTR, DG and FDO, let’s take a look at the fundamentals and relative strength of all three.

Next Page: Dollar Tree (DLTR)

Dollar Tree (DLTR)

Dollar Tree DLTR stock chart
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After a tepid earnings report in February, Dollar Tree (DLTR) bounced back with a solid first-quarter report last week. Earnings were up more than 11% year-over-year, while revenue was 7.2% better.

Less than a week later, DLTR stock received an upgrade from “neutral” to “buy” at Sterne Agee. The stock, which has been trading between $50 and $55 since the beginning of 2014, was given a $61 target price — a good 15% higher than its then-current price. noted that call buying was very brisk on DLTR, reflecting a bullish outlook.

Dollar Tree shares trade at 19 times earnings and boast a return on equity of nearly 40%. Of the three stocks in the dollar-store sector, DLTR is the only one that has improved (+3.4%) in the past month, and it has handily bested the other two in performance over the past three, six and 12 months.

One small negative: DLTR does not pay a dividend.

Grade: B

Next Page: Family Dollar (FDO)

Family Dollar (FDO)

Family Dollar FDO stock
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Family Dollar’s (FDO) second-quarter earnings report was awful, and it was the second consecutive quarter of bad earnings. This time, FDO blamed winter weather and a shorter calendar for its woes. Earnings dropped from $1.21 per share in the year-ago quarter to 80 cents.

A number of changes were announced by management to try to improve the company’s financial performance going forward, but many of these were negative, such as closing stores and laying off staff. FDO stock has been floundering ever since, and the company has been rumored to be a takeover candidate. Paulson & Co. recently sold a very large stake of FDO stock, and earlier this year, Family Dollar’s chief operating officer resigned.

The best one can say about Family Dollar is that it does offer some backside protection in the form of a 2.2% yield, and it’s slightly cheaper than DLTR with a 17 P/E. Of course, that’s largely thanks to a 20%-plus slide off its peak in the fourth quarter of 2013. Meanwhile, ROE is 26%.

Lastly, FDO stock is currently sitting on its 200-day moving average, and has been trading sideways over the last month, so it’s possible it could find support at this level.

Grade: C

Next Page: Dollar General (DG)

Dollar General (DG)

Dollar General DG stock chart
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Dollar General (DG) CEO Richard Dreiling might have tipped investors off to difficult times ahead for DG. In March of this year, he sold $19 million worth of his company’s shares at $57.92 on the open market.

DG stock has been steadily declining from the beginning of 2014, from a peak of $62.93 to a closing price of $53.50 last Thursday. While Sterne Agee was boosting its rating on DLTR, it was cutting its rating on DG from “buy” to “neutral,” and lowering its price target from $63 to $58. Deutsche Bank also cut its rating on DG from “buy” to “hold.”

Dollar General isn’t pricey, trading just under 17 times earnings, but ROE is just south of 20%.

As you can see from the accompanying chart, DG has a very weak technical outlook at the moment, having gapped down through support on heavy volume. The 50 day moving average has crossed below the 200 day moving average. Several technical indicators, such as RSI, MACD, and Stochastic are pointing lower, suggesting there is more downside to come. The next support level is not until the $50 level.

DG reports earnings before the bell tomorrow, and recent activity suggests that their earnings could fall short of expectations.

Grade: C-

As a note: I wouldn’t call any of these stocks a rip-roaring buy. However, DLTR does appear to be the superior member of the dollar store group, with the best earnings, relative strength and ROE of the three.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

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