For those familiar with these two discount retailers, it’s widely known among the tight-budget community that, well… DLTR is clearly the cheaper option, right? Every item it sells at its physical locations costs $1 (plus sales tax, of course) — but wait, didn’t they put an end to that or something? Indeed, DLTR did begin selling items at specific locations for more than just a dollar a pop.
As told by DLTR CEO Michael Witynski, the increased rates would help the firm survive escalating supply chain and personnel expenses, which hurt its profit margins. This redeeming message did not appear to achieve its goal, as some consumers even reported being “sick to their stomachs” upon hearing the news.
Today, I’m breaking down two sector-related stocks side-to-side for comparison. Although I have my personal experiences, they won’t play a part in the process. I’ll quickly lay out the critical similarities and differences between DG and DLTR in the full report here:
To pick up where we left off: The message of DLTR selling products for more than a dollar to keep the doors open was not received well initially, but people are coming back around. We’re in the supply and need territory, after all.
DG, on the other hand, has already been selling products for over $1 per item without a strict pricing limit for as long as I can remember, at least. Everything was simply discounted. As a result, I’ve always found that Dollar General, unlike DLTR, has had a much more extensive and varied inventory, such as relished brand names that you would simply never find in a Dollar Tree location. If you could find anything like it, it would be a generic brand, with the smallest quantity possible and presented deceptively.
You know when you get a bag of chips, but only a third of the bag is actually full when you open it? From how it sounds, DLTR’s business model more or less forced itself into turning that concept into its business practice. Why? My best guess is that it could then pay the bills and continue operating while also staying loyal to those who’ve relied on those dollar-a-pop discounts.
Dollar General (DG)
With its price up 4.80% year-to-date, has forecasted revenue and earnings-per-share of $10.3 billion at $3.24 per share for the fiscal fourth quarter of 2022. For the past twelve months, DG has shown a beta figure of 0.38, a P/E ratio of 24x, a P/S of 1.53, and a Return on Equity margin of 38.33%. DG has a market cap of $55.19 billion, currently working with $1.9 billion in free cash flow. DG’s Q3 2022 earnings report beat analysts’ projections with revenue at $9.46 billion and EPS at $2.20 per share. Analysts kind enough to offer annual pricing estimates have given DG a median price target of 275.00, with a high of 295.00 and a low of 195.00. The high end of the range suggests a 19.40% increase over current pricing, and DG has received an attractive buy rating thanks to analysts as well.
Dollar Tree (DLTR)
Dollar Tree (DLTR)’s stock is also up, instead by 3.23%, and for the fourth fiscal quarter, shows approximately $7.6 billion in sales, with an EPS of $2.01 per share. One difference I see quickly is that DLTR, by most standards, is undervalued. Like DG, DLTR has a safe beta score of 0.70— to speak plainly, meaning that (since it’s under a level of 1.00) it is less prone to volatility than the overall market itself. DLTR has a P/E ratio of 18.9x, a P/S of 1.19, and a TTM (trailing twelve months) EPS of $7.27 per share. Regarding quarterly results, it impressed Wall Street in Q3 2022, bringing in $6.94 billion in revenue at $1.20 per share EPS and a net income of $267 million. With far less debt than DG, its free cash flow is also lower at $1.15 billion. Both DG and DTLR show solid year-over-year growth in categories that matter. The price-predicting analysts have DTLR currently marked with a median price target of 165.50, with a high of 200.00 and a low of 109.00, making for a potential 36.52% rise from its latest price. DLTR, as with its competitor, receives an eerily similar buy rating.
They are both buy-rated and have very similar metrics except for two things. I quickly noticed the drastic change in stock price ranges between the two — around a hundred-dollar difference. After going back through my notes, it was clear that one big difference got by me, and it’s something that generally doesn’t.
So, here’s the tiebreaker:
DG has a dividend yield of 0.90%, with a quarterly shareholder payout of 55 cents ($2.20/yr) per share. The rest – well, I leave it up to you to decide. For example, would you pay a higher price to get that dividend? Or is it worth it for you to go with DLTR’s higher upside potential instead? They both could make for great portfolio additions in today’s market climate, as they’re considered part of the “fast-moving consumer goods” retail sub-sector, sometimes referred to as FMCGs. They’re cyclical stocks and can provide comfort amidst a patience-testing market in recovery mode.
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