The industry responds
I’ve discussed Family Dollar’s response above. As for Dollar General Corp. (NYSE:DG), it saw significant competition in the last half of the year and its story is one of expanding sales in consumables. In particular, its move into tobacco has caused some margin contraction. The simple fact is that dollar-store customers remain economically hard-pressed. Any strategy to expand into higher-margin categories has been met with resistance. Meanwhile, end markets are getting more competitive.
Turning to Dollar Tree, I think its recent results were quite good and contained a few notable positives.
- Discretionary-items sales are growing faster than consumables. This should help margin growth in the future.
- Gross margins improved thanks to merchandise leverage and operating margins improved.
- E-commerce initiatives are driving growth and opportunities to attract store traffic.
- Store openings continue, with 375 new stores and 75 relocations planned planned for 2013.
- A wide-scale program to increase the number of stores with freezers and coolers should drive incremental traffic.
- The Deals format stores should allow for growth opportunities with higher-priced ticket items without compromising the core appeal or recognition of its Dollar Tree, Inc. (NASDAQ:DLTR) format.
In summary, Dollar Tree, Inc. (NASDAQ:DLTR) has managed to increase margins while carrying on investing in new stores. It’s guiding towards a 7.3% increase in square footage for 2013 and forecasts low-single-digit same-store sales growth.
Where next for the dollar stores?
With all this said, the sector’s strong run doesn’t really leave any of these companies looking cheap. With companies in their growth phase, it is important to realize that they will not be generating high cash flows when they are investing for growth. With that in mind I decided to adjust their free cash flow figures by taking their depreciation rates as a proxy for capital expenditures.
The figures for Dollar General Corp. (NYSE:DG) and Dollar Tree, Inc. (NASDAQ:DLTR) are for the last full year but I’ve calculated the numbers for Family Dollar on a trailing basis because its full year runs to August.
We can see the effect of the poor inventory decisions by Family Dollar in the cash flow numbers.
Frankly none of these stocks looks cheap right now. Even with adjusting for the extra expenditures implied in their store roll-outs, I don’t think that the underlying metrics make them attractive. Despite their attractive growth prospects, the dollar stores still have competitive conditions, and it probably makes sense to wait a bit for a better entry point and some confirmation that same-store sales growth has stabilized.
The article Do Dollar Stores Still Offer Good Value? originally appeared on Fool.com.
Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Lee is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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