Dollar Tree, Inc. (DLTR), Dollar General Corp. (DG): Do Dollar Stores Still Offer Good Value?

Investing in the dollar stores has been one of the most profitable trades since the 2008 financial crisis. With that said, it has been a bumpy ride along the way with all of the leading players having experienced a difficult second half to 2012 and then a nice recovery in 2013. In the light of Dollar Tree, Inc. (NASDAQ:DLTR)’s latest results I thought I would shed some light on what has been happening in the sector.

The dollar stores in 2012

The general story with the dollar stores can be explained by a couple of charts. The first is the price performance over the last year:

DG data by YCharts

This indicates that the market was very willing to buy their growth stories up until the middle of 2012. So what went wrong?

The answer is that Dollar General Corp. (NYSE:DG) and Dollar Tree, Inc. (NASDAQ:DLTR) started experiencing falling same-store sales growth. Meanwhile, Family Dollar Stores, Inc. (NYSE:FDO) did experience same-store sales growth in 2012, but this was at the expense of margins. I’ve discussed its issues at more length in an article linked here.

In summary, Family Dollar had tried to expand its sales of higher-margin home and apparel goods but ran itself into procurement difficulties. In a sense, it was guided to make such an attempt because it tends to sell a lot of consumables (which tend to be lower margin) and generates significant traffic by doing so. However, the difficulties that it found in trying to expand in these categories speak volumes about the highly competitive nature of its industry.

As for the general growth slowdown, I think it is a normal consequence of a business development. All three firms have chased growth by engaging in significant capital expenditures to fund expansion. It is natural that at some point same-store sales growth will slow because competitors will be attracted to the industry and start to encroach on their market share. This can come from things like dollar stores opening up near each other or from supermarkets like The Kroger Co. (NYSE:KR) or Safeway Inc. (NYSE:SWY) deciding to compete on price through things like loss-leading discounts or promotions in order to drive traffic.