Dollar Tree, Inc. (NASDAQ:DLTR)’s significantly lower number of stores may also be seen as a growth factor, since opportunities abound to expand in both existing and new markets. In this context, maintaining its 7% square footage CAGR seems possible and likely.
Last but not least, two other items should be highlighted:
1) The advantaged position to resist Wal-Mart’s advance (Dollar Tree already experiences the highest Wal-Mart overlap in the sector, while still retrieving the highest operating margins).
2) The outstanding management team that has delivered great results, as sales CAGR grew by 12%, EBIDTA CAGR by 24%, and EPS CAGR by 30% between 2007 and 2011. In addition, leverage ratio is way below the sector’s average, and free cash flow is quite above it, allowing capital reinvestment and stock repurchases that result in EPS upsurges.
A potential out-performer
Family Dollar Stores, Inc. (NYSE:FDO) is just in between. It’s not as large as Dollar General Corp. (NYSE:DG), but bigger than Dollar Tree, Inc. (NASDAQ:DLTR). Nevertheless, the company’s stock is expected to outperform its main competitors this year, achieving an 18% increase in price (versus Dollar Tree’s 17% and Dollar General’s 9%), reaching a target price of $81.
Several reasons back this projection. In the first place, the aforementioned expansion opportunities of the sector provide a positive outlook for a company that has much room to occupy in the U.S., for it hasn’t yet penetrated numerous highly profitable markets.
Operating performance provides some extra advantages, as Family Dollar Stores, Inc. (NYSE:FDO) still offers plenty of places for improvement, given its $2 earnings-potential-per-share gap with Dollar General Corp. (NYSE:DG). Prospects to narrow this distance seem promising, as new initiatives, like the roll-out of tobacco, an aggressive remodel campaign, and a distribution agreement with McLane are implemented by a new, highly experienced management team. Even though completely closing the gap with Dollar General seems improbable in the short run, reducing it by half could add around 30% to the company’s income.
Conclusion
While the Dollar Store sector is expected to continue growing, the question is who will develop the most? Although Dollar General Corp. (NYSE:DG) currently leads the segment (in size), and Family Dollar Stores, Inc. (NYSE:FDO) is expecting the biggest up in stock price, it’s Dollar Tree, Inc. (NASDAQ:DLTR) that shows the most promising outlook (at least in the mid-term). Significantly higher multiples than its competitors strongly suggest that Dollar Tree is the company expecting the bigger boom. It’s highly differentiated concept makes it an interesting investment, as it doesn’t seem that growth will reach its limit any time soon.
The article My Analysis On The Leading Dollar Stores originally appeared on Fool.com and is written by Victor Selva.
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