Dollar Stores Continue to Gain Food Shoppers

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 |  Includes: BJ, COST, DG, DLTR, FDO, KR, NDN, SVU, WFM
by: Rick Shea

Dollar Tree (NASDAQ:DLTR) announced their recent earnings, and Wall Street likes what it sees (see transcript here upon availability). Dollar Tree reported strong earnings on a +12 % sales gain. Net margins continue to improve driven by expanded offerings of branded and private label foods.

Click to enlargeConsumers continue to favor these low price leaders along with club stores Costco (NASDAQ:COST) and BJ's (NYSE:BJ), and extreme value stores like Aldi and Save-Alot (subsidiary of Super Valu (NYSE:SVU).

The price sensitive consumer appears to be here to stay, and food products are the main driver of traffic for the non-traditional grocery stores. Dollar Tree announced a strong +6.6% increase in traffic in the latest quarter.

Discount food retailers are seeing similar overall strength in customer traffic as consumers continue to diversify their food shopping occasions from traditional grocery stores. Grocery store leaders Whole Foods (WFMI) ,Super Valu and Kroger (NYSE:KR) continue to feel sales pressure from the discounters with the perception of value being the key consumer decision criteria.

In the Dollar Store world, Dollar General (NYSE:DG) and Dollar Tree continue to perform the best in terms of sales comps and profitability. Dollar General generates 11.5 billion in annual sales and they posted a +13% increase in sales in the latest quarter. Family Dollar (NYSE:FDO) has sales of $7.5 B but slower growth at +4%.

Dollar Tree ranks third in total sales with $5.1 billion in annual sales. 99 Cents Stores has the lowest mix of food and generated +4% growth on $1.35 B in sales. Dollar Tree and Dollar General have the strongest net margins at 9% and 8% respectively. All are expanding the amount of food products being offered and that is helping drive traffic for the total dollar store universe.

The trend towards improved traffic at dollar stores driven by food purchases should continue throughout 2010. Of the 4 main competitors we like Dollar Tree best for its strong growth and reasonable valuation. Dollar General also continues to perform well and has the largest market share, but sports a slightly higher PE (23 versus 17) than Dollar Tree, despite similar growth projections. We think the discount/value trend will continue, making both Dollar Tree and Dollar General good stocks for potential buys.

Disclosure: No positions