Here’s why Dollar General is a better buy than Dollar Tree

Investors are rightly drawn to the deep end of the retail industry. With soaring inflation and rising interest rates, companies that help consumers spend more of their money in this economy are poised to do well.

There are probably no better examples of this than the two biggest discounters, General dollar (DG 0.16%) and dollar tree (LTRD 0.93%)which beat the stock market indexes hands down.

Yet while Dollar Tree has jumped 49% over the past year, versus Dollar General’s 8% gain over the past year (and versus a 13% drop for the S&P500), Dollar General might just be the dollar store stock investors want to buy right now.

Image source: Dollar General.

stand out

Dollar General has long been willing to sell merchandise above the $1 threshold, although most merchandise in its stores is $10 or less. Dollar Tree, which has long been the pure game of the industry, selling everything for $1 or less, has the Family Dollar chain which also sells a mix of products at different price points. But Family Dollar is still struggling to consistently contribute to growth.

Yet Dollar General and Dollar Tree have excelled because they both made significant investments in consumer goods years ago, installing refrigerators and freezers in virtually all of their stores. Although the products generate lower profit margins than other merchandise, they build customer loyalty and help increase the average ticket value at checkout.

Dollar General, however, distinguished itself by adding fresh produce to thousands of stores, with the eventual goal of carrying it in more than 10,000 stores. It is also expanding its focus on healthcare through its DG Wellbeing initiative. This expands the product offering in stores; and in some locations, it makes preventive care, emergency care, and chronic disease management available through a mobile phone provider called DocGo On-Demand.

Targeting the Price-Sensitive Buyer

Where it gets really interesting is in the very deep discount part of its space-defining business. Dollar Tree, out of necessity, has wisely expanded the availability of higher-priced products to provide greater choice for its customers, while Dollar General finds it beneficial to double – and triple – the segment at $1 or less of its operations.

During the just-announced second quarter, CEO Todd Vasos said, “The $1 price tag was one of the fastest, if not the fastest growing sub-categories we had here at DollarGeneral.” As a result, Dollar General is “definitely leaning into both the private label and the $1 price tag” to help shoppers feed their families, especially towards the end of each month as money tightens. apparently.

And private label products help the company increase sales even further, as consumers under pressure show a willingness to give up branded products in exchange for the cheaper price that private label products offer. Dollar General is making strong consumable penetration gains with these products, with sales growing quarter-over-quarter and year-over-year.

Stable as it grows

Dollar General raised its guidance for the year and now expects sales to grow 11% from 2021 on same-store sales growth in the range of 4% to 4.5%, and management expects earnings per share to be 12% to 14% higher than a year ago.

While Dollar Tree expects earnings to rise 25% for the year with earnings per share forecast between $7.10 and $7.40, this represents a sharp drop from its previous forecast of 7. $.80 to $8.20 per share, mostly due to issues at Family Dollar. Sales are expected to increase by 6% compared to last year.

With the dance two steps forward and one step back with Family Dollar, Dollar Tree’s full potential seems muted. Dollar General, however, has been a much more consistent discount retailer. And with a forecast of steady growth and expansion as its value proposition appeals to price-sensitive consumers, I find its stock to be the best buy.

Rich Duprey has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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