Family Dollar Stores, Inc. (FDO): Is This Dollar Store a Post-Earnings “Buy”?

Dollar Tree, Inc. (NASDAQ:DLTR) is a completely different business model, selling everything for $1. Yet remarkably, it has the highest margins of any dollar store, and has managed this feat despite rapid store expansion.

Personally, I don’t know how Dollar Tree has produced its margins, but during its last quarter we did see a slowdown in its higher margin discretionary products. Therefore, with Dollar Tree having the most to lose, and the highest valuation relative to sales, I also believe that Family Dollar is the more attractive of the two.

Final Thoughts

As far as I’m concerned, Family Dollar Stores, Inc. (NYSE:FDO) is the best stock in this space, both in valuation and in growth outlook. Moreover, with a dividend yield of 1.6% and a payout ratio of 24% there is still room for the company to give more back to shareholders.

With that said, I still can not comprehend why the company did not buyback shares, and I view both the macro shift and tightened guidance as a potential problem in the space. Therefore, as I compare Family Dollar Stores, Inc. (NYSE:FDO)’s forward P/E ratio of 16.34 to the S&P 500 and its growth to the rate of GDP I see that it is slightly more expensive than the overall market.

Thus, with a dividend yield that is less than the S&P 500 “SPY” ETF, I think I feel more comfortable in avoiding this space altogether for now and seeking value elsewhere. Overall, the value that it presents relative to the space does not outweigh its expense and the problems that it faces.

The article Is This Dollar Store a Post-Earnings “Buy”? originally appeared on Fool.com and is written by Brian Nichols.

Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Brian 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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