The Dollar Retailers Smash Earnings But Which Is The Better Buy?

Discounters Win In The Rush To Pantry-Load

It’s no secret the pandemic spurred a round of pantry-hoarding the likes of which we’ve never before seen. Staples giant and dividend powerhouse Clorox (CLX) said demand increases for some of its products topped 500% and that is no joke. 500%. Not only are the makers of staples items (Clorox sells much more than bleach products, don’t you know) not only are the makers of staples items seeing a surge, so are the businesses who sell them.

Big-name discounters like Costco and Walmart (WMT) dominate the mainstream media but there are others well-positioned for today’s times. Like my MarketBeat colleague Steve Anderson says, not everybody needs to buy their steak sauce in a five-gallon bucket. Dollar Tree (DLTR) and Dollar General (DG), the nations leading dollar-mart retailers, both reported earnings today proving their worth in today’s market. The question for us today is, which one is the better buy?

There’s Really No Comparison

I want to start off by saying that both companies performed exceptionally well for the quarter. Both also have a robust and positive outlook for the year despite any COVID-related uncertainty. That said, I think it unnecessary for me to give away the answer to soo because it will quickly become apparent which is the better buy.

The Results

Dollar Tree produced revenue of $6.29 billion dollars. The figure is up 8.3% from last year and beat consensus by 244 basis points. Comps for the quarter came in at 7.0%, strength in the Family Dollar segment offset slight weakness in Dollar Tree-branded stores. The bottom line is this, adjusted and GAAP EPS both came in hotter than consensus in the 15% to 20% range.

Dollar General produced revenue of $8.45 billion dollars. This figure is up 27.6% from the previous year and beats consensus by over 1000 basis points. Comps grew by 21.78% across the enterprise with gains in both ticket averages and headcounts. The bottom line GAAP results beat by 47%. Nothing to see but solid results here, move along, move along.

The Outlook

Dollar Tree is projected to grow revenue by less than 0.5% this-year to next-year, fiscally speaking (both companies reported on Q1 results today), with EPS growth in the range of 14%. Dollar General is expected to see 5.7% revenue growth over the next year, with EPS growth in the range of 10.3%.

The mitigating factor for the Dollar Tree, with its weaker revenue growth, is the recently-completed merger with Family Dollar. The merger appears to be working, at least for the Family Dollar segment, so an expectation for analyst upgrades is not unwarranted. For Dollar General, the outlook is the same. This quarter’s strength suggests the analysts were too conservative in their estimates and a round of upgrades is on the way.

The Dividend, A Divisive Factor If Ever I Saw One

If you are a dividend investor there is one factor that slams the case shut for our less-attractive choice. Dollar Tree does not pay a dividend and Dollar General does. Better, the dividend at Dollar General is attractive if small and aiding a technical picture I will discuss in a moment. At today’s prices, Dollar General is yielding a mere 0.77% but there is a high-probability of aggressive increases in the future.

The company has already been increasing its distribution at a double-digit rate, 12.5% with the last increase, and the payout ratio is ultra-low. The payout ratio before today’s news was running near 19%, after today’s news the ratio is running a much cooler 14% so there is room in the budget. Those expecting an increase may have to wait, the last increase was only a quarter ago so the next won’t likely be until next spring.

The Technical Picture - A Leader And A Laggard, Both Bullish

The technical picture is just as different for these stock as the results and outlook. While both are bullish, there is a clear winner in the market’s eye. The choice of which is the better buy for your portfolio may come down to which story you want to buy: the dividend-paying market leader with a positive outlook, or the growth-play market laggard with an equally positive outlook.

Dollar General is in an uptrend that pandemic-driven panic selling barely fazed. The stock has clearly rebound from its lows, set new highs relative to the pre-pandemic period, consolidated and is now firing a strong trend-following entry signal. A simple projection of the post-correction rally form the new buy-signal puts a possible ceiling on the move in the range of $230 or about 25% from today’s levels.

Dollar Tree has not had the same support in the post-correction period, probably because of its 0.0% yield, but it is set up to move higher. The stock is moving up from a solid base of support and, with today’s news, breaking above its pre-correction resistance levels. The move smacks of bullishness and suggests DLTR will be playing catch-up to its competitor. The risk now is resistance at the $100 level, if that can be overcome a move to the $120 range is probable.