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Introduction

The discount retail industry is comprised of retailers that tend to offer a wide variety of products, but compete mainly on price. Companies within this industry vary greatly, from huge companies like Wal-Mart (NYSE:WMT) to newer companies like Groupon (NASDAQ:GRPN).

When thinking of discount retailers, I like to think in terms of dollars, as in how many dollars can the retailer save me? For this article, I will be reviewing the following three discount retailers and determining whether or not they should be considered as attractive long term investments: Dollar General (NYSE:DG), Dollar Tree (NASDAQ:DLTR), and Family Dollar (NYSE:FDO).

In determining whether these stocks are attractive long term buys, I will be looking at each company's current financials, current valuation and recent trading activity, earnings, dividends, and company outlooks.

Stock #1: Dollar General

Company Overview

Dollar General Corporation is a discount retailer, the largest discounted retailer in the United States by number of stores with over 11,000 stores throughout 40 states. engages in the provision of various merchandise products in the United States. DG offers various consumable products such as food, snacks, health and beauty aids, cleaning supplies, basic apparel, house wares and seasonal items at low prices. The company was founded in 1939 and is based in Goodlettsville, Tennessee.

Current Financials

Gross Profit Margin (Quarterly) 31.34%
Profit Margin (Quarterly) 5.59%
Return on Assets ((NYSE:TTM)) 9.54%
Return on Equity 19.86%
Revenue 16.80B
Quarterly Revenue Growth (YOY) 11.29%

Dollar General has seen strong growth in both revenue and profit over the past five years, with a 66.13% increase in revenue and a 53.12% increase in gross profit over that time period. Looking at the chart below, you can see just how consistent the company's growth has been.

DG Revenue (Annual) Chart
(Click to enlarge)

DG Revenue (Annual) data by YCharts

Current Valuation and Recent Trading Activity

DG has a current price to earnings value of 19.80x and a price to book value of 3.68x. Looking at the chart below you can see that the current PE ratio is still on the lower end of the company's historical PE ratio over the past several years, while the current price to book value is in line with the company's consistent price to book value.

DG PE Ratio (<a href=
(Click to enlarge)

DG PE Ratio (TTM) data by YCharts

DG closed Friday at $59.26, just $0.61 shy of its 52-week high and $19.53 higher than its 52-week low. DG is trading above its 50-day moving average of $58.03 and its 200-day moving average of $54.85.

DG has seen the following price returns:

1 Month Price Return 3.87%
Year to Date Price Return 34.40%
1 Year Price Return 25.59%
3 Year Price Return 104.2%

Earnings

For its last quarterly report, DG reported earnings per share of $0.77. This was 3 cents higher than the estimate and 8 cents higher than the same period last year.

Looking at this chart, you can see the consistency DG has seen in increasing its earnings over the past five years. A time period in which annual EPS has risen by an amazing 744%.

DG EPS Basic (Annual) Chart
(Click to enlarge)

DG EPS Basic (Annual) data by YCharts

Dividend

Dollar General does not currently pay a dividend.

Company Outlook

Recently, DG announced a new management structure that the company hopes will help achieve continued future growth. This is a great move by DG as the company realizes that seeing large growth (such as nearly doubling sales since 2007) means that changes to the company's infrastructure is most likely required.

DG knows that its customers are looking for the best value when shopping. Recently, the company edged out other retailers such as Wal-Mart as the number one least expensive place to shop among retailers.

With DG's track record of increasing revenue, profit, and earnings over the past several years, along with the fact, that the company's stock continues to trade near its 52-week highs, I believe that DG's future is looking bright.

Stock #2: Dollar Tree

Company Overview

Dollar Tree, Inc. is an American chain of discount variety stores that sells every item for $1.00 or less. The company operates approximately 4,700 stores throughout 48 states. DLTR was founded in 1986 and is based in Chesapeake, Virginia.

Current Financials

Gross Profit Margin (Quarterly) 34.97%
Profit Margin (Quarterly) 6.72%
Return on Assets 23.59%
Return on Equity 38.71%
Revenue 7.69B
Quarterly Revenue Growth (YOY) 8.82%

DLTR has seen similar growth in revenue and profit as DG, actually beating DG by around 6% in gross profit over the past five years.

DLTR Revenue (Annual) Chart
(Click to enlarge)

DLTR Revenue (Annual) data by YCharts

Current Valuation and Recent Trading Activity

DLTR has a current price to earnings value of 21.09x and a price to book value of 7.33x. Looking at the chart below you can see that DLTR's current valuation is on the higher side of the company's recent history, seeing that for much of the past five years DLTR has had a PE ratio below 20x and a price to book value at or below 5x.

DLTR PE Ratio (<a href=
(Click to enlarge)

DLTR PE Ratio (TTM) data by YCharts

DLTR closed Friday at $59.91, just $0.28 shy of its 52-week high and $22.44 higher than its 52-week low. DLTR is trading above both its 50-day moving average of $58.73 and its 200-day moving average of $53.67.

DLTR has seen the following price returns:

1 Month Price Return 1.75%
Year to Date Price Return 47.66%
1 Year Price Return 58.61%
3 Year Price Return 123.7%

Earnings

For its last quarter, DLTR reported earnings per share of $0.56. This was 1 cent lower than its estimate, but 5 cents higher than the same period last year. DLTR's earnings estimate for next quarter is $0.60 per share.

Looking at the chart below you can see that just like DG, DLTR's earnings have steadily increased over the past five years. However, you can also see that the increase percentage hasn't been quite as impressive.

DLTR EPS Basic (Annual) Chart
(Click to enlarge)

DLTR EPS Basic (Annual) data by YCharts

Dividend

DLTR currently does not currently pay a dividend.

Company Outlook

Dollar Tree's future looks bright as well. The positives of the company can be seen throughout several areas such as its revenue and profit growth, increases in earnings, and improvements in return on equity as well as net operating cash flow. There is no reason to assume that DLTR's growth will not continue into the foreseeable future.

There is however some reasons to take pause when looking at the company's stock. One of the main reasons is that the stock looks to be slightly overvalued at the moment. This may prevent new investors from being able to make significant gains in coming years. Another reason to be cautious is the fairly recent double digit jump in short interest for this stock.

Stock #3: Family Dollar

Company Overview

Family Dollar Stores, Inc. operates approximately 7,000 self-service retail discount stores primarily for low to middle income consumers throughout 45 US states and the District of Columbia. FDO was founded in 1959 and is headquartered in Matthews, North Carolina.

Current Financials

Gross Profit Margin (Quarterly) 34.71%
Profit Margin (Quarterly) 4.08%
Return on Assets 12.06%
Return on Equity 30.82%
Revenue 10.39B
Quarterly Revenue Growth (YOY) 5.84%

Family Dollar has seen a fairly impressive and consistent increase in revenue and profit over the past several years.

FDO Revenue (Annual) Chart
(Click to enlarge)

FDO Revenue (Annual) data by YCharts

However, when compared to the increases that both Dollar General and Dollar Tree have seen over the same period, it becomes less impressive.

Current Valuation and Recent Trading Activity

FDO has a current price to earnings value of 18.26x and a price to book value of 5.04x. Looking at the chart below, you can see that FDO is closer to DLTR than DG in that both its price to earnings and price to book values are at the higher end of the company's recent history.

FDO PE Ratio (<a href=
(Click to enlarge)

FDO PE Ratio (TTM) data by YCharts

FDO closed Friday at $70.02, $5.27 shy of its 52-week high and $15.96 higher than its 52-week low. The stock is trading above both its 50-day moving average of $69.87 and its 200-day moving average of $67.78.

FDO has seen the following price returns:

1 Month Price Return 0.53%
Year to Date Price Return 10.39%
1 Year Price Return 6.58%
3 Year Price Return 44.75%

Earnings

For its latest quarterly report, FDO reported earnings per share of $0.86. This was a 3 cent increase over estimates and an 11 cent increase over the same period last year.

Looking at the chart below, you can see that FDO's earnings have steadily increased over the past five years. But out of the three companies, FDO's earnings has definitely increased at a much slower pace (85.1%) compared to 744.1% for DG and 218.9% for DLTR.

FDO EPS Basic (Annual) Chart
(Click to enlarge)

FDO EPS Basic (Annual) data by YCharts

Dividend

Of the three stocks, FDO is the only one that currently pays a dividend. It pays a $0.26 quarterly dividend that equates to a 1.49% yield.

Looking at the chart below, you can see that FDO's dividend has steadily increased over the past several years. During this time, FDO has been able to maintain a low payout ratio, implying that the growth and consistency of its dividend is fairly safe.

FDO Dividend Chart
(Click to enlarge)

FDO Dividend data by YCharts

Company Outlook

While this year hasn't been necessarily bad for Family Dollar, it is hard to argue that it has been good either, especially when compared to competitors DG and DLTR. One of the biggest issues for Family Dollar is same store sales. For its latest quarter, same store sales remained flat from the same period last year. That's not good, and it's flat out bad when you take into account that DG's same store sales were up 5.1% in its lasted quarter and DLTR's were up 3.7%.

It's not that FDO is performing terribly, it's just that the company is performing at a much worse level than both DG and DLTR. The only advantage FDO's stock seems to have is that it pays a dividend, but that is not enough to make up the differences in revenue growth, earnings growth and price appreciation when comparing FDO to DG or DLTR.

I think that as FDO and DG continue their impressive growth, it is going to become more and more difficult for FDO to prosper. And I wouldn't be surprised to see those flat same store sales numbers start to decline in the coming quarters. And when that happens, I believe the stock will see significant losses.

Conclusion

Out of the three stocks reviewed above, DG and DLTR are the two stocks that I think are the safest and best long term investments. I don't think FDO will provide the same kind of returns over long periods of time that DG and DLTR are capable of yielding.

Choosing between DG and DLTR becomes a tougher call to make, but right now I would have to give a slight edge to DG. While DLTR has seen more growth in revenue and gross profit, DG has the edge in earnings growth. DG also appears to be the stock that is currently valued more attractively. When you add in the fact that DG brings in more than double the revenue of DLTR, it becomes even more impressive that the company has stayed right on the heels of DLTR in terms of revenue and profit growth.

Personally, I trust DG more than I do DLTR to continue its strong growth in the coming years. I think DG's recent changes to its management infrastructure is a perfect example of the company making the moves it needs to make to continue its strong growth in revenue and earnings. I think both DLTR and DG will provide solid returns for investors in coming years, but if you only are going to add one of these stocks to your portfolio I would go with DG.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.