In one of my past assignments, I worked as an Associate Brand Manager at a Fortune 100 company. That company attempted to differentiate itself from the competition by having a superior understanding of the customer.
In that assignment, we did a number of things such as shop-alongs (where you literally shop alongside someone, make observations, and ask probing questions to help you understand how they make purchasing decisions), research studies, videotaping, interviews, and focus groups.
From both the focus groups and interviews, a key insight that I vividly remember about the Dollar Channel (Family Dollar, Dollar General Corp. (NYSE:DG), and Dollar Tree, Inc. (NASDAQ:DLTR)) was how people thought about the shopping experience. An overwhelming number of people described the shopping experience almost exactly the same way: “like treasure hunting.”
That was somewhat surprising to me, because prior to those discussions I had unfairly assumed that the only people who shopped at those stores were people of very modest means with little disposable income, when in fact many fairly well-off people shop there, particularly when they “want to buy a small gift for someone” or “need prizes for games.”
So maybe that helps explain why many of these “recession stocks” or “trade down plays” have low betas and can perform well in any market.
Now I am going to go bargain hunting in the Dollar Channel (including Big Lots) and see if there are any hidden treasures.
Are Big Lots, Inc. (NYSE:BIG), Dollar General Corp. (NYSE:DG), Dollar Tree, Inc. (NASDAQ:DLTR), and Family Dollar Stores, Inc. (NYSE:FDO) hidden treasures in today’s market?
Big Lots
Big Lots operates broadline closeout retail stores in the United States and Canada. Similar to some of the larger retailers, it operates six merchandise categories: Consumables (food, health and beauty, plastics, paper, chemical, pet supplies), Furniture (upholstery, mattresses, ready-to-assemble, bedroom, dining room, fireplaces, furniture), Home (domestics, stationery, home decorations), Seasonal (lawn & garden, holidays, summer), Play n’ Wear (electronics, toys, jewelry, infant accessories, and apparel) and Hardlines & Other (appliances, tools, paint, home maintenance).
Big Lots, Inc. (NYSE:BIG) trades at a P/E ratio of slightly less than 13 and is up by more than 17% year-to-date. Still, this company is trading well off its 52-week high of $47.22. Big Lots has a net profit margin of around 4% and a forecasted 5-year earnings growth rate of 9.65%. A 12-week target price in the $37 – $40 range suggests a healthy yearly return of around 10% – 20%. Big Lot’s (NYSE:BIG) next reporting date is March 1.
Dollar General
Dollar General also operates as a discount retailer in the United States. Dollar General offers national brands as well as private label brands at substantial discounts to national brands. Similar to Wal-Mart, Dollar General offers its merchandise at everyday low prices. Except that there is one major difference: store size. To put that into perspective, Dollar General’s average store size is a mere 7,200 square feet, compared to 102,000 square feet for an average Wal-Mart Discount store (Supercenters average 197,000 square feet). That means that it is very easy to change the layout and product offerings, as well as to open and close stores.
Dollar General Corp. (NYSE:DG) trades at a P/E ratio of slightly less than 17 and is up around 4% year-to-date. Like Big Lots, Dollar General is also well off its 52-week high. Dollar General has a net profit margin of more than 5% and a forecasted 5-year earnings growth rate of around 17%. A 12-week target price in the $50 – $53 range suggests a yearly return of around 10% – 15%. Dollar General’s next reporting date is March 25.
