One sector that has been a big winner throughout the novel coronavirus pandemic has been the discount retail sector. The discount retail sector is a $95 billion sector. Names like
Walmart (NYSE:WMT) and
Target (NYSE:TGT) are
among the first to come to mind when consumers think low prices. But they are not the only players in this segment. This is particularly true if you live in a small town or in rural America.
A growing subsector of discount retail is the dollar store chains. Two of the best-known names are Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR). In fact, these two names account for nearly half of this sector’s revenue. So it’s appropriate that investors may want to invest in one of these companies. But which one is the better choice?
The Case For Dollar General
Coming off a 2019 that saw DG stock climb approximately 44%, investors were wondering if the growth could continue. At first, like all stocks, Dollar General was battered by the novel coronavirus. But since the March selloff, the stock is up almost 50%, and it has a gain for the year of just over 30%.
One of the reasons for this is that Dollar General tends to focus on rural areas. The company has over 16,000 stores across the United States. And with millions of Americans on the unemployment rolls, the stores have been receiving significant traffic. And most items in the store sell for around $5 to $10.
But it’s not just the unemployed. As millions of Americans sheltered in place (some in rural areas), Dollar General was one of the few essential businesses that remained open.
And Dollar General is also moving into different areas. One initiative, DG Fresh gives the chain the ability to ship fresh and frozen produce to its stores. It’s also experimenting with Fast Track, a self-checkout process in select locations. Add to this, Dollar General’s increasing e-commerce presence and there are factors that support its long-term growth.
The Case For Dollar Tree
Dollar Tree operates as two dollar store chains. There is its namesake Dollar Tree and they also operate as Family Dollar stores. In the world of dollar store chains, the idea of buying things for one dollar is somewhat of a myth. However one of Dollar Tree’s claims to fame is that it does offer a variety of items that are priced at $1 or less. This can make it a lower cost option (for some goods) than Walmart or Target.
Like Dollar General, Dollar Tree is focusing on growth. As of the previous quarter, the discount chain has opened 99 new locations this calendar year. And it plans to open a total of 500 stores during its fiscal year which began in February. Dollar Tree also has a strong balance sheet. The company’s most recent earnings report showed that it had over $1.7 million in cash and cash equivalents.
So far in 2020, Dollar Tree has not had the same level of growth as Dollar General. DLTR stock is up 11% for the year. The company reports earnings on August 27 and is expected to post earnings of 92 cents per share on $6.2 billion of revenue. That would compare somewhat favorably with the $1.04 EPS and $6.3 billion in revenue from the prior quarter.
And the Winner Is …
My tongue-in-cheek answer is the consumer. There’s really never been as many discount options for them to benefit from. And the truth is both of these companies look like they will be delivering positive results for at least the rest of 2020.
However, if I have to pick one, I’m going with Dollar General. While both companies have been doing well throughout the pandemic, Dollar General is scheduled to report blowout earnings and the company pays a modest dividend that they increased this year. That’s no small feat when many companies are suspending or canceling their dividends.
Dollar General just seems to already be where Dollar Tree wants to get to. And that’s something that I have to imagine consumers will notice as well.
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