Are These Discount Retailers Worth the Risk? – Wal-Mart Stores, Inc. (WMT), Family Dollar Stores, Inc. (FDO), Target Corporation (TGT)

Mixed Results Among Dollar Stores

A healthier consumer benefits dollar store stocks. Consumer confidence has improved with the economy. In January 2013, the U.S. economy added about 157,000 jobs, while the unemployment rate was 7.9%. However, consumer spending is expected to remain tight with consumers remaining price-conscious as they continue to deleverage.

Dollar Tree reported its third quarter results with net sales of $1.72 billion, representing an increase of 7.8% as compared to the previous year. The company’s operating margin improved 40 basis points. Dollar General reported its third quarter results, according to which its net income was $208 million or $0.62 per share as compared to $171 million or $0.50 per share during previous year.

However, not all is well among dollar store stocks. Family Dollar Stores, Inc. (NYSE:FDO) has become a defendant in a class action lawsuit filed in the  Western District Court of North Carolina by Robbins Geller Rudman & Dowd. This class action suit is based on allegations of misrepresented demand, sales, and financial results posted in calendar November and December of 2012. The stock dropped about 13% when management revealed disappointing results in January of 2013. A press release by Robbins Geller Rudman & Dowd questions whether management cashed-out their personal holdings before reporting this bad news.

Valuation

There isn’t a value-based justification for buying Wal-Mart or Family Dollar:

Their share prices do not reflect the problems affecting these firms. They do not offer compelling value and growth relative to their peers.

Conclusion

There really aren’t any discounts for bad news in Wal-Mart and Family Dollar. Investors who are interested in exposure to discount retailers should look at other names on this list.

The article Are These Discount Retailers Worth the Risk? originally appeared on Fool.com and is written by Bill Edson.

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