Dollar General Corp. (DG), Dollar Tree, Inc. (DLTR): Is This Retailer a Buy at 52-Week Highs?

Stiff competition
Dollar General competes with the likes of Wal-Mart Stores, Inc. (NYSE:WMT) and other dollar stores and competition in this space is stiff. In May this year, Bloomberg reported that prices at Wal-Mart are lower than Dollar General in most categories. Wal-Mart Stores, Inc. (NYSE:WMT) beat Dollar General on pricing in household goods 100% of the time while other items such as grocery, auto supplies, etc. were cheaper 85% of the time at Wal-Mart Stores, Inc. (NYSE:WMT).

In addition, Wal-Mart Stores, Inc. (NYSE:WMT) has been looking to improve its presence in residential areas, thereby invading the turf of the dollar stores.

An alternative
At a trailing P/E of almost 20, Dollar General’s valuation is in line with peers such as Dollar Tree, Inc. (NASDAQ:DLTR), which trades at a slightly cheaper 19 times earnings. But with an estimated annual earnings growth rate of almost 17% for the next five years for Dollar Tree, Inc. (NASDAQ:DLTR), it might make for a slightly better bet than Dollar General.

The factor working in Dollar Tree, Inc. (NASDAQ:DLTR)’s favor is that it isn’t selling tobacco to attract customers and as a result, its gross margin has remained steady. Dollar Tree, Inc. (NASDAQ:DLTR) is focusing on increasing store count and making stores more productive. It has around 4,800 stores at present and sees the potential for a total of 7,000 stores in the U.S.

In addition, Dollar Tree, Inc. (NASDAQ:DLTR) has 160 stores in Canada and believes that it can grow to 1,000 stores in the long run. As such, investors looking for a slightly cheaper and a tad more lucrative option might look at Dollar Tree, Inc. (NASDAQ:DLTR) as an alternative to Dollar General.

The takeaway
Dollar General seems to be implementing the right strategies to improve sales, and they are bearing fruit as the previous quarter’s results show. However, it is not the cheapest option among peers, and its margin might be under pressure going forward as sales of tobacco and consumables grow, while lower prices at competitors are another concern.

The article Is This Retailer a Buy at 52-Week Highs? originally appeared on Fool.com and is written by Harsh Chauhan.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 

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