Family Dollar Stores, Inc. (FDO), Dollar Tree, Inc. (DLTR), Dollar General Corp. (DG): It’s Still Not Time to Buy the Dollar Stores

Comparable same stores down across the industry

As ever it is useful to compare how same store sales are faring across the industry. Please note that these numbers are adjusted to the calendar year as these companies have different reporting periods.

It’s clear that same store sales growth started slowing in mid 2012. Family Dollar Stores, Inc. (NYSE:FDO) did achieve some growth but, as discussed above, that was largely a consequence of an expansion in lower margin product sales. The dollar stores are seeing slowing comparable same store sales growth and traditional grocers (Safeway Inc. (NYSE:SWY), The Kroger Co. (NYSE:KR) etc) are starting to fight back through engaging customers with pricing and promotional activity.

While these issues are affecting the industry there has been no let up in their store expansion strategies. Indeed Dollar General affirmed that its number one investment priority was to open new stores. Indeed it is planning $575 million to $625 million in capital expenditures and hoping to open 635 new stores while relocating/remodeling around 550 stores. Is this push for growth, by the whole industry, a wise strategy given that same store sales growth is slowing?

Are the dollar stores good value now?

As ever we need to put the growth prospects in the context of valuation. Dollar General’s forecast for comparable same store sales growth of 4-5% isn’t bad in a slow economy and its earnings are forecast to grow double digits over the next few years. On the other hand none of the dollar stores look particularly cheap right now and the expansion plans are impacting the generation of free cash flow.

For companies in a growth phase I like to equate their capital expenditures with depreciation in order to create an adjusted free cash flow number.

In conclusion I think it’s still time to hold fire on the sector right now. It’s probably better to follow its customers and hold out for a discount.

Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article It’s Still Not Time to Buy the Dollar Stores originally appeared on Fool.com.

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