Is Dollar General the Best Dollar Store?

Discount retailer Dollar General shot up last week after impressive third-quarter results. Shares hit an all-time high as results exceeded expectations and the company raised the low-end of its full-year earnings guidance. In addition, Dollar General management bumped up the share repurchase authorization by $1 billion. Driven by these developments, Dollar General is now the best performing dollar store stock this year when compared to Dollar Tree and Family Dollar .

Swimming against the current
Dollar General's positive performance might have come as a surprise to many, especially considering the fact that peer Dollar Tree had posted tepid results late last month. Dollar Tree missed estimates, issued a weak outlook, and blamed cautious spending and flagging consumer confidence as the reasons behind its weak results, triggering weakness at other dollar store chains as well.

However, these are the factors that should ideally see the dollar stores doing more business since they offer merchandise at discounts. It seems like Dollar General has capitalized on these issues as sales increased 10.5% while net income grew 14% from the year-ago period. Also, being the "least expensive place to shop," according to a Kantar Retail survey, further explains why Dollar General saw good traffic in its stores. Same-store sales were up 4.4% from the year-ago period as Dollar General's strategy of selling tobacco in its stores worked well. 

In fact, Dollar General's same-store sale growth was superior when compared to both Dollar Tree and Family Dollar. Considering that Dollar General is the largest dollar store chain, it is impressive to see that the company is still growing at a fast pace.  

Aggressive strategies
Looking ahead, it won't be surprising if Dollar General pushes past its current 52-week high. The company has been optimizing store space to increase productivity, leading to an increase in market share in consumable items . Sales of tobacco once again played an important role in higher sales. Earlier this year, management had said that two-thirds of customers who buy tobacco at a Dollar General store combine their purchase with one or more items. 

Also, Dollar General's aggressive installation of coolers in its stores sent sales of consumables goods up by 12%. The company has been remodeling its stores so that it can push sales of consumables higher. Its Dollar General Plus format carries wider aisles and bigger coolers, and this should help it maintain the solid same-store sale growth momentum that it has gained of late by attracting more customers.  

Dollar General now sees a bigger opportunity to expand its stores. Earlier, management believed that there was scope for 10,000 stores in the U.S. However, now they believe that there is the possibility of 14,000 stores.  

Dollar General has already opened slightly more than 11,000 stores, and it still expects to increase its store base by around 27%. In fact, Dollar General plans to open 700 new stores in fiscal 2014, up from its 650-store target for 2013. In addition, 525 stores will be remodeled as Dollar General updates them for better productivity. 

In this manner, Dollar General would cement its position as the most dominant dollar store out there. A wide store network and lower prices than peers could help Dollar General increase its lead over both Dollar Tree and Family Dollar.

Cheap and best
According to Kantar, Dollar General's average basket price of $28.70 was the lowest. Family Dollar was third in the survey, with an average basket price of $30.81. The difference between the two is a substantial 7.4%, and this is probably one of the reasons why Family Dollar has been seeing lower store traffic. Family Dollar's same-store sales remained flat in the previous quarter, and the company expects the metric to decline in the low-single digits in the current quarter.

This is a massive drop from the 6.6% jump Family Dollar had delivered last year. It looks like Family Dollar's strategy of selling tobacco products and more consumable items isn't turning out to be as successful as Dollar General's.

One can deduce that Dollar General has brought its A-game to the discount retail industry and has been trumping its peers. Its overall low prices have helped it outperform Dollar Tree, which, with 4,800-plus stores, is the smallest dollar chain.  

Dollar Tree's growth has taken a beating of late, with same-store sale growth slowing down. In the previous quarter, Dollar Tree reported 3.1% comps growth, and this figure might further slow down to 2.4% in the ongoing quarter. Thus, Dollar General is keeping competition at bay successfully, and its strategies could make it more dominant.

The takeaway
Investors might be wondering if Dollar General is still a buy at 52-week highs. But the stock isn't too expensive at 20 times earnings, especially when the slower growing Dollar Tree trades at a similar multiple. The prices it offers are low, the valuation is decent, the store network is wide, and it has an aggressive expansion and remodeling plan in place; all of this makes Dollar General a good option for both consumers and investors.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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