Dollar Tree, Inc. (DLTR), Dollar General Corp. (DG): Square Footage Growth and Online Channel Will Drive Sales for This Retailer

Family Dollar Stores, Inc. (NYSE:FDO) has reported 146 bps lower gross margins than the consensus estimate in last quarter’s results. This decline was accredited to poor performance in the discretionary category, where the Home and Apparels segment faced weak demand. In the second half of this year, the company is expecting margins to go up with more direct sourcing and more private label expansions. Its new “Fee Development Program” will be helpful in generating high margins. Fee Development Program is a part of store growth strategy, where the company will open new stores and relocate old stores with more cost effective financing. In this program, stores will be developed and sold or leased back on margins to be run by others.

Source: Google Finance and Yahoo Finance Date: June 1, 2013

Dollar Tree reported an operating margin of 11.61% and 1-year forward P/E of 14.74, which is the highest among the peers mentioned above. Dollar General Corp. (NYSE:DG) has the highest operating margin of 12.41% and the lowest forward P/E of 13.89. Family Dollar Stores, Inc. (NYSE:FDO) has the lowest P/S ratio of 0.65 but also the lowest operating margin of 7.5% and relatively higher forward P/E of 14.46.

Conclusion

Dollar Tree has taken some strong initiatives for growth in the future. It will increase selling space with square footage growth in the US and Canada. Its online channel, with chain-wide Mastercard Inc (NYSE:MA) rollout, is expected to drive traffic in the future. Its new merchandising initiatives will increase impulsive purchases. Dollar General is also expanding its stores with tobacco rollout across all stores, so I recommend a “buy” for both these stocks for long term investment. Family Dollar Stores, Inc. (NYSE:FDO) is suffering from low gross margins, and its store growth initiatives will take time to impact margins. Hence, I recommend a “Sell.”

The article Square Footage Growth and Online Channel Will Drive Sales for This Retailer originally appeared on Fool.com and is written by Ash Sharma.

Ash Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ash 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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