These stocks have all enjoyed tremendous runs because a weak economy has led consumers to seek out the discounts dollar stores offer. This trend has led investors to bid up share prices of dollar store stocks to extreme valuations.
- DLTR trades at 23 times current earnings.
- FDO trades at 17.8 times current earnings.
- DG trades at 20.9 times current earnings.
These earnings multiples are significantly higher than other retailers that do not target the discount market.
- Target (NYSE:TGT) trades at 12.1 times current earnings.
- Kroger (NYSE:KR) trades at 12.3 times current earnings.
- Macy's (NYSE:M) trades at 13.2 times current earnings.
Dollar store stock earnings multiples are much higher than other comparable discount retailers.
- Wal-Mart (NYSE:WMT) trades at 13.1 times current earnings.
- Big Lots (NYSE:BIG) trades at 15.4 times current earnings.
Additional Headwinds The improving economy is a potential negative for dollar stores. As the economy improves, some consumers will likely switch back to more expensive stores that offer higher quality products.
The rise in prices for basic commodities will almost certainly lead to increased prices for dollar stores. The dollar stores will then we faced with a dilemma: absorb price increases to maintain the brand or raise prices and risk losing their core customer.
Shares of dollar store stocks are too expensive for investors to own. It is time to shift out of dollar store stocks and into other retail stocks that are more of a bargain.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.