I have just recently started to look at the low-cost retail sub-sector a bit more closely, after having observed the remarkable performance of (and written about) Ross Stores (RST) and, most recently, Dollar General (DG).
But an analysis of either of these companies and stocks would be incomplete without a side-by-side look at their most direct competitors. Today, I set aside Ross for a moment and focus on Dollar General -- a company that I have recently called "all-weather" due to its apparent ability to perform well in both good and bad macro environments.
Credit: montage using images from PG Harris and Dallas Morning News
In this article, I face off Dollar General against key peer Dollar Tree (DLTR) to try and determine which of these stocks might be the most compelling play in the general merchandise discount space. While I do not intend to issue a definitive statement on which name might be the best buy without performing further due diligence, I hope this comparison will serve as a good "first impression" analysis.
Digging into the numbers
Let"s start with general facts and figures on both companies.
Dollar General is a much older retailer that has been around long enough to see, survive and thrive through different economic periods. Both companies have a very similar footprint in terms of number of stores in operation, although Dollar General has been growing its store count more aggressively recently. Curiously, Dollar Tree operates on a much smaller employee base of only about 56,000 workers vs. my estimated 129,000 for Dollar General.
Source: DM Martins Research, using data from company reports
On recent financial results, both companies have been producing outstanding top-line figures -- despite the recent increase in disposable income that could have suggested discount stores would fare a bit worse during periods of economic strength. Likely driven by a more aggressive footprint expansion, Dollar General is expected to deliver more robust revenue growth in the coming year. On profitability, both retailers boast similarly healthy gross and op margins of about 31% and 9%, respectively -- relatively rich, despite being in the low-ticket consumer product retail business.
Source: DM Martins Research, using data from company reports
Outside the P&L, Dollar General"s balance sheet and cash flow statement look a bit better than those of Dollar Tree. The Tennessee-based company is less indebted than its peer by a good margin, while it was able to produce stronger free cash flow in the past year. It is perhaps not surprising that Dollar General is the only one of the two to pay dividends, and it has done so by distributing less than a quarter of its 2017 free cash to shareholders.
Source: DM Martins Research, using data from company reports
In terms of efficiency, Dollar General once again appears to come out ahead. The retailer produces more revenues both on a per-store and per-square foot bases. The same, however, can not be said about the per-employee output.
Source: DM Martins Research, using data from company reports
Finally, on the stocks, DG and DLTR seem to tie on valuation: the former is cheaper on a forward P/E basis, while the latter comes out ahead in PEG and price-to-book terms. Both shares are off their 52-week highs by more than 10%, but DLTR looks a bit more de-risked after taking a big hit (arguably unjustified) following the release of its 4Q17 results.
Source: DM Martins Research, using data from company reports
Last few words
As I had mentioned in the beginning of this article, my goal here was to face off these two leading discount retailers and try to assess which stock might seem like a better buy at first glance. Looking at the numbers above and judging from what I saw when it reported its fourth quarter numbers, I currently have a preference for DG. It seems to have the best combination of growth, balance sheet robustness, strong cash flow generation and reasonable share price.
I would like to hear from you now. Which stock do you believe is a better bargain? Share your opinion in the comments section below.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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