A Surprising New Boost for Dollar Stores -- Ahead of the Tape
25 August 2016 - 5:41AM
Dow Jones News
By Steven Russolillo
A dollar goes a long way these days.
Dollar General Corp. and Dollar Tree Inc. have been big winners
in the stock market, up more than 20% over the past year on strong
sales growth and higher store traffic. Rising wages among their
core clientele suggest the good times may continue as both
companies gear up to release second-quarter earnings reports,
expected Thursday.
The dollar chains thrived during and after the recession and
have built on those days. Dollar General has added more items
priced between $1 and $5, boosting its margins. And Dollar Tree
bought rival Family Dollar, which it is still integrating a year
after the $9 billion deal was completed.
Both have embraced the smaller-store format, which typically
generates positive cash flow at a faster rate than other retail
locations. And they don't seem to be threatened as much by the
likes of Amazon.com Inc., or even Wal-Mart Stores Inc., as other
retailers.
The tight job market is providing another boost. Weekly wages
for full-time American workers in the bottom quarter of the income
scale rose 3.1% in the second quarter from a year ago. That marked
the sharpest increase since 2009, according to the Labor
Department. Dollar General chief Todd Vasos acknowledged this on an
earnings call in May, saying shoppers are "probably feeling a
little more confident and spending a little bit more."
Both companies have expanded their selection of discretionary
products, such as home goods and beauty products. This is a sign of
confidence that they see their customers being more able and
willing to spend.
The risk is the customers move to more mainstream retailers.
That is unlikely because dollar chains typically serve lower-income
neighborhoods whose residents make frequent, small purchases.
The question now is whether these stocks have rallied too far.
Both surged to records following their previous earnings reports in
May and have added to gains since. And both sport premium multiples
relative to the S&P 500. Dollar General fetches about 19 times
projected earnings over the next 12 months, a 20% discount to
Dollar Tree.
Hefty valuations shouldn't scare investors. It doesn't look like
this buck will break anytime soon.
(END) Dow Jones Newswires
August 24, 2016 15:26 ET (19:26 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
Dollar General (NYSE:DG)
Historical Stock Chart
From Apr 2024 to May 2024
Dollar General (NYSE:DG)
Historical Stock Chart
From May 2023 to May 2024