Dollar Tree, Inc. (DLTR), Dollar General Corp. (DG) & Family Dollar Stores, Inc. (FDO): What Do the Earnings of Discount Stores Reveal?

Long term vs. Short term

For dollar stores, some improvements are expected in the coming quarters due to an end to the cold weather. Secondly, the better job numbers should also offset, at least to some extent, the negative impact coming from payroll taxes.

The management of Dollar General Corp. (NYSE:DG) in particular has pointed out that it is taking the necessary steps to bring down the theft levels.

However, I believe that the bigger issue for this industry is to figure out how it is going to continue its growth as the saturation point, discussed earlier, approaches.

Then, there is the growing competition from Wal-Mart which is looking to eliminate the Dollar stores’ competitive advantage: their location in residential areas. The retail behemoth is opening new neighborhood stores and a recent survey by Bloomberg has revealed that Wal-Mart was offering lower prices in household goods, grocery, auto supplies, pharmacy and beauty aids. Thus because of Walmart, the dollar stores are forced to keep a lid on their prices. In the long term, as the competition intensifies, I believe that the dollar stores will be forced to reduce their prices and their margins will take the hit.

In other words, while there are reasons to be optimistic about the coming quarters, over the longer term, the situation isn’t looking rosy.

For Dollar General Corp. (NYSE:DG), the soft sales of non-consumables could create more problems in the future. The company’s shares have also struggled and have fallen by 2% in the last four weeks due to its weak guidance Family Dollar Stores, Inc. (NYSE:FDO)believes that consumer’s discretionary spending will remain challenging throughout the year.

As a result, the stocks of Dollar General Corp. (NYSE:DG), Family Dollar Stores, Inc. (NYSE:FDO) and Dollar Tree, Inc. (NASDAQ:DLTR) have remained under pressure. However, there is an opportunity here. Add Dollar Tree’s superior performance and little complains — particularly about the cold weather — to the equation and I believe that this makes its shares more attractive than its rivals, particularly for the short term. Several analysts, including Goldman Sachs and MKM Partners, are bullish on Dollar Tree, Inc. (NASDAQ:DLTR) and have recommended a “buy” rating.

Sarfaraz Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article What Do the Earnings of Discount Stores Reveal? originally appeared on Fool.com.

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