Are Dollar Stores Still A Growth Story? – Dollar Tree, Inc. (NDLTR), Family Dollar Stores, Inc. (FDO), Dollar General Corp. (DG)

So what’s the best way to play discount retail? Dollar General is the location leader, with over 10,000 locations. Family Dollar has around 7,500 and Dollar Tree only 4,600. Meanwhile, Wal-Mart has 8500 locations and Five Below 240. The revenues stack up in a similar fashion, with Dollar General leading the way with $14.8 billion, Family Dollar $9.3 billion and Dollar Tree at $6.6 billion. Despite Dollar Tree’s low-end position, iwth respect to locations and revenue, I see this as an expansion opportunity.

As far as valuation goes…

• Dollar Tree 14.6x
• Family Dollar 12.7x
• Dollar General 13.4x
• Five Below 53x
• Wal-Mart 12x

• Dollar Tree 1.3x
• Family Dollar 0.7x
• Dollar General 0.9x
• Five Below 5x
• Wal-Mart 0.5x

Family Dollar is the cheapest of the three major discount retailers, and Dollar Tree is now the most expensive after its recent run up in stock price. But is the premium valuation warranted? Perhaps. The five year expected EPS growth (according to Wall Street estimates) is:

• Dollar Tree 17%
• Family Dollar 13%
• Dollar General 17%
• Five Below 35%
• Wal-Mart 9%

Dollar Tree also has a leading position in return on investment, versus notable other high growth company Dollar General:

• Dollar Tree 33%
• Family Dollar 22%
• Dollar General 11%
• Five Below 17%
• Wal-Mart 13%

Don’t be fooled. Family Dollar is the only major dollar store paying a dividend yield, one that yields 1.5%. Although Dollar Tree doesn’t currently pay a dividend, it easily could, with $288 million in cash and generating some $687 million in cash flow from operations over the trailing twelve months. Putting a similar payout ratio as Family Dollar’s current dividend on Dollar Tree’s EPS would suggest its dividend yield would be around 1.6%.

A couple top hedge funds were upping their stakes in Dollar Tree during the fourth quarter. Lone Pine Capital boosted its stake over 200%, now Dollar Tree’s top hedge fund owner, and Blue Ridge Capital boosted its stake 40%, now Dollar Tree’s second hedge fund owner (check out all of Dollar Tree’s hedge fund owners).

What’s more is that Dollar Tree is a bit more expensive, but the stock also has very robust growth prospects and impressive return metrics (read more about why Dollar Tree is a bargain). This includes above average returns on investment and returns on equity. Dollar Tree also has the greatest potential with respect to location growth. The industry should be helped by the nicheness of the stores when compared to the likes of Wal-Mart, where Dollar Tree stores are smaller and easily navigated, not to mention lower price points.

The article Are Dollar Stores Still A Growth Story? originally appeared on Fool.com and is written by Marshall Hargrave.

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