Ranking America's Dollar Stores Before The Double Dip Hits

by: Jefferson Starship

It has been exactly three years since Lehman Brother’s declared bankruptcy and the financial world came spiraling down to earth. Needless to say, it’s been a wild and unprecedented ride, not just for investors, but for everyone — with bailouts, foreclosures, widespread unemployment, and GDP slowing to a halt. As dismal as that sounds, stocks were only getting pummeled for six months, and since then there has been a lot of volatility, but growth none the less. It cannot be argued that stocks are not better now than they were two years ago.

What we have seen is a thinning of the American workplace and, on a grander scale, an alteration of the American dream. Jobs are no longer available, unemployment benefits have been stretched further than Chris Christie’s waistband, and mom & pop shops have folded under the power of nationwide chains. The last point is the basis of this article. Everyone knows that the Wal-Mart’s (NYSE:WMT), Targets (NYSE:TGT), and Costco’s (NASDAQ:COST) are basically taking over the world with their one-stop shopping super centers. Despite this, there is still demand for quick, convenient shopping and the recession has helped to break the misnomer that dollar stores are dark, creepy, dirty places to shop. Or perhaps the dollar stores have collectively cleaned up their acts realizing the market opportunity that existed. Either way, they have picked up customers and they are proving that they are here to say.

So that just leaves picking a winner, which is no easy task, but can be tackled analytically. Jim Cramer actually discussed this earlier in the week and chose Dollar General (NYSE:DG) as his bull (probably because they paid him the most). Regardless, his on-air analysis was sort of spotty due to time restraints, so I’ve taken it upon myself to present some information on the following companies. First off, it should be stated that these companies are all very similar. They trade within very close price-to-earnings ratios, PEG ratios, and have fairly comparable profit margins. Second, the companies are listed by number of stores.

99 Cents Only Stores (NYSE:NDN) – 99 Cents Only operates 287 stores with 212 in California and the rest spread out across Texas, Arizona, and Nevada. They are currently priced in the high $18s and do not pay a dividend. They have a market cap of $1.3B, by far the smallest on the list, and have a P/E of 17.75. Their most recent quarter was up 5.2% YoY and another thing that sticks out is that they have very little debt. As you can see, their share price has been quite sporadic over the last year with a huge earnings jump in March and a huge earnings drop in August, and somehow traded within a $1 range over those 6 months. Unfortunately, there is really nothing you can confer from the technicals on this one and there target prices are not much higher than where they are sitting now.

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Dollar Tree (NASDAQ:DLTR) – Dollar Tree has over 4,000 stores in 48 states and Canada. They’re all over my home state of New Jersey. They are the most ‘expensive’ at $74.76, but share price really should not be a gauge of how expensive something is, but of course you know that. But they have the highest P/E at 20, so they are indeed the most expensive. They have a market cap of $9B and trade at a much high volume than 99 Cents Only. I say that because it means that they may not be as susceptible to large swings in price. Dollar Tree killed their last earnings, up 21% YoY. Technically speaking they are in great shape. Their uptrend is pretty apparent, though they are probably hitting the top of the channel right now, and they have decent support. The one aspect I worry about is the debt they are carrying and it if will affect their cash flow in the future.

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Family Dollar (NYSE:FDO) – Family Dollar has over 7,000 stores in 44 states. Their market cap is middle of the road at $6B and their volume is also in the middle. They are currently priced around $52 at a P/E of 17. They are the only company on the list that pays a dividend, which at 1.4% is not great but it’s something. Their earnings were up 6% YoY, and like Family Dollar, this company has a debt problem. There is a strong chance that this accounted for by new store openings, i.e. borrowing. As you can see below, their graph, for a lack of a better word, is ugly. It’s jumping all over the place and they got crushed in August. Fundamentally, there may be a play to be made, but deciding when to pull the trigger would be tough on this one.

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Dollar General (DG) – Dollar General has over 9,500 stores in 35 states, mainly in the more populated portions of the country. They also have a really cool name, but I digress. They are the largest of the four at $12B and are currently priced at $37. Their P/E is a little high at 19, but not higher than Dollar Tree, and they have the highest volume on the list. Dollar General had the lowest quarterly earnings growth, at 3% but this could be attributed to any number of factors, like outstanding figures last year. Like the previous two, there is an issue of debt, but again I think this comes with expansion. Also, Dollar General has great cash flows, their income has been rising at incredible rates the past few years. Technically, there is a small upward swing since a bottoming out in August. Their recent jump in price was on relatively stable volume, with the exception of one down day. I would think, given their volatility this stock could be picked up between $35 and $36 and even lower if the market continues to drop as a whole.

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The two choices here would have to be Dollar Tree and Dollar General, with a slight nod going to the former. I noted that their P/E’s were slightly higher than the other two, and this was not without reason. The market also thinks that these two have a better shot at prevailing so they are willing to pay a premium for that chance. They are very similar companies, both growing. I do like that Dollar General is picking their store locations better, but this could hurt them with the economy finally turns it around. Dollar Tree also has better margins and their graph suggests better growth prospects.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.