Dollar stores have been on a tear since the financial crisis.
Consumers flocked to the low-price stores in an effort to pinch
But even as the economy has rebounded, many of these companies
have continued to perform fairly well. It appears they have
integrated themselves into the lives of shoppers to the point
that dollar stores are becoming one-stop shops.
This comes as they have expanded into tobacco and consumer
staples. Dollar stores are also typically much smaller and easier
to navigate than the likes of big-box merchants like
, which makes them ideal for consumers who are short on both time
But not all dollar stores have continued to perform well
throughout the strengthening economy. One of the biggest players
in the market,
Family Dollar (NYSE:
, has come under fire from billionaire activist Carl Icahn.
Family Dollar's net income has grown at an annualized 7.4%
over the past three years, which is impressive on a stand-alone
basis. But when stacked up against industry leader
Dollar General (NYSE:
, which has seen annualized growth of 17.7% over the same period,
it appears Family Dollar is in need of a makeover.
Icahn owns nearly 10% of Family Dollar, and he is pushing the
company to sell itself. He joins activist Nelson Peltz of Trian
Partners, who owns 7.3% of the company. On a performance basis,
shares of Family Dollar have underperformed both Dollar General
and the S&P 500 over the past three years.
There's speculation that Icahn will either push Family Dollar
and Dollar General to merge or get Wal-Mart to buy the struggling
retailer. There's also the potential for a private equity
Different Business Models
Wal-Mart and Family Dollar are very different, catering to
different customers. It seems unreasonable that Wal-Mart would
want to get in the discount business, especially since it's
starting to roll out its own small-format stores.
Meanwhile, why would Dollar General buy up an underperforming
retailer when it can open up new stores of its own to accelerate
growth? Dollar General's stores are bringing in close to $159
million per store, compared with Family Dollar's $128
Dollar General has plenty of room to continue increasing its
market share. It has a 11,000-plus store base and plans to add
another 700 this year. Compare that to Family Dollar's 8,100
stores and Wal-Mart's 5,000.
The key for Dollar General, compared to Wal-Mart and Target,
is that its smaller stores are ideal for small towns. Its
discount-pricing model is well-received in rural areas, giving
Dollar General a large addressable market.
Hedge Fund Interest
While Family Dollar does have a major activist that owns nearly
10% of the company, Dollar General has a "who's who" among hedge
fund owners. A couple of the largest shareholders are "Tiger
Cubs" Stephen Mandel of Lone Pine Capital and Chase Coleman's
Tiger Global. Fellow billionaires Leon Cooperman and John Paulson
are just a couple of the newest owners of Dollar General as of
The hedge fund interest is definitely more robust in Dollar
General. This comes as the company is a consistent performer:
Last year marked the twenty-fourth straight quarter that Dollar
General saw growth in comparable-store sales.
While Dollar General doesn't offer a dividend yield (compared
to Family Dollar's 1.8% yield), it is active on the buyback
front. Over the past three years, Dollar General has reduced its
shares outstanding by 11.2%, compared with Family Dollar's
Family Dollar appears to have set a stock price floor, having
bounced from the $50 to $55 range a number of times through the
years. This comes as buyout speculation has circulated since
2011, when the retailer successfully fended off the buyout
attempt by Trian Partners.
Shares of Family Dollar are trading at a forward
price-to-earnings (P/E) ratio of 20 based on next year's earnings
estimates. Meanwhile, Dollar General trades at a forward P/E of
15. But Family Dollar's net profit margin over the past 12 months
is a full 2 percentage points below Dollar General, coming in at
Risks to Consider:
Dollar General managed to perform well during the tough
economic environment, but as the economy rebounds, consumers may
eventually start moving back to upmarket retailers. The other
issue is Dollar General's aggressive store growth, where it could
hit saturation and start to see a decrease in per-store
Action to Take -->
My price target on Dollar General is $80. That's upside of 30%
and is based on the assumption that Dollar General should be
trading more in line with the industry average as well as its
five-year average P/E multiple.