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The Overview

Both Dollar Tree Inc (NASDAQ:DLTR) and Dollar General Corporation (NYSE:DG) are booming companies with excellent stocks and potential. They have both seen significant demand, as shown by increases in recent institutional buying: a 19% increase in institutional buying for Dollar General in its fourth quarter of 2011 compared to an 8% increase in institutional buying for Dollar Tree over the same period. However, both operate in the Variety Stores/Discount Industry and the Services Sector, creating a potential conundrum for investors who don't want their investment portfolio to be potentially overweight in one particular niche. So which company is a better investment?

The Niche

Dollar Tree and Dollar General are discount retailers that operate mainly in the United States. Dollar Tree also has branches in Canada while Dollar General operates in the southern, southwestern, midwestern, and eastern United States. Both are booming in part due to their appeal to lower- and middle- income America, recent economic hardships, as well as significant expansion and seasonal profitability; According to Thomson Reuters' director of research, Jharonne Martis, discount stores will see the bulk of holiday sales strength in the services sector. Wedbush Securities analyst Joan Storms also points out that discount retailers such as Dollar Tree and Dollar General have managed to make the most out of holiday shopping by storing seasonal items that appeal to consumers during the holiday season.

Overall, discount/variety retailers have shown extremely strong growth this year. According to Investor's Business Daily, this industry group currently ranks No. 4 out of its 197 industry groups in terms of performance. With that said, although they are competing in the same sectors, Dollar Tree and Dollar General have somewhat different business models. Dollar General has a multi-price-point model in which its products vary in pricing, but are generally $10 or less. Dollar Tree, on the other hand, is the country's largest single-price-point retailer, with all of its products set at $1. According to Peter Keith, Senior Research Analyst at Piper Jaffray, Dollar Tree also has a very flexible merchandise assortment, partly due to lower customer expectations of the quality of the products. Overall, Dollar Tree and Dollar General have slightly different business models but are still benefiting from occupying the same prospering sector.

The Result

Both Dollar Tree and Dollar General are, in a nutshell, prospering. Dollar General's 2011 4Q EPS are up 28% year over year, with a healthy 6.4% earnings surprise. This puts the average EPS growth of the last 3 quarters at a solid 22%. For the current quarter, estimates are up and the EPS is estimated to increase by 30% year over year. Dollar General's performance is even more stratospheric when approached from an annual basis. Its 3 Year EPS Growth Rate is 77%, with the current 2011 EPS estimated to post an increase of 24.73%. Dollar General also has had 3 consecutive years of EPS Growth. Sales are also up, albeit moderately: year over year, 2011 4Q sales were up 12% while the 3-Year Sales Growth Rate is a sound 11%. Dollar General's Annual Pre-Tax Margin is somewhat small at 7.8%, but it has a healthy Annual ROE of 17.3%. Dollar General has a Debt/Equity Ratio of 81%

Dollar Tree has comparable numbers. In its 2011 4Q, Dollar Tree reported an EPS increase of 19% year over year and a 4.8% earnings surprise. The average EPS growth of the last 3 quarters was 26%. For the current quarter, estimates are up and EPS estimates constitute a 22% increase over same-quarter EPS earnings a year ago. The 3-Year EPS Growth Rate, while not as stellar as Dollar General's, is still extremely positive at 36%. Dollar Tree has had 4 consecutive years of EPS Growth, with the current 2011 EPS expected to increase by 24.14%. 2011 4Q sales were up 12% year over year and the 3-Year Sales Growth Rate is also 12%. Dollar Tree has an Annual Pre-Tax Margin of 11.2%, an Annual ROE of 28.6%, and a Debt/Equity Ratio of 17%. Although the Annual Pre-Tax Margin is low, Dollar Tree's Annual ROE is comparably better than that of Dollar General, which also has a much higher Debt/Equity Ratio.

The Verdict

You can't go wrong with either Dollar Tree or Dollar General; both are extremely healthy momentum/growth plays that satisfy the vast majority of CAN SLIM criteria. However, I believe that Dollar Tree is a slightly better investment. As Peter Keith of Piper Jaffray has noted, Dollar Tree's single-price-point strategy separates it from most of the other discount retailers, including Dollar General, in terms of merchandise flexibility. Also, Dollar Tree has a much wider reach than Dollar General, as well as a significantly smaller Debt/Equity Ratio and a higher Annual ROE.

Source: Dollar General Or Dollar Tree?