Surging inflation due to the deepening of supply chain disruptions has made everyday essentials expensive for consumers. Therefore, offering merchandise at comparatively lower prices has led to discount stores witnessing increasing store traffic. The U.S. discount department stores industry is expected to grow 0.8% and generate $99.20 billion in revenue in 2022.
Dollar General Corporation (DG) and Dollar Tree, Inc. (DLTR) are two prominent discount retail stores operators in the United States. DG operates a chain of discount retail stores that offers merchandise, including consumable items, seasonal items, home products, and apparel. DLTR operates a discount variety store chain that sells an assortment of everyday general merchandise, including kitchen and dining, toys, books, crafts, cleaning, personal care, glasses, food carriers, gifts, and other household products. The company operates through Dollar Tree and Family Dollar segments.
DG is up more than 13% in the past month and DLTR is up 14.75%. Which of these stocks is a better pick now? Let’s find out.
Recent Financial Results
DG’s net sales for the fiscal 2021 fourth quarter ended January 28, 2022, increased 2.8% year-over-year to $8.65 billion. The company’s gross profit came in at $2.70 billion, representing a 1.3% year-over-year decline. Its operating profit came in at $796.67 million for the quarter, indicating an 8.7% decline from the prior-year period. DG’s net income came in at $597.43 million, down 7.1% from the year-ago period. Its EPS decreased 1.9% year-over-year to $2.57. The company had $344.83 million in cash and cash equivalents as of January 28, 2022.
For its fiscal 2021 fourth quarter ended January 29, 2022, DLTR’s total revenue increased 4.6% year-over-year to $7.08 billion. The company’s operating income came in at $578.80 million, indicating a 15.1% year-over-year decline. Its pre-tax income came in at $499.20 million, down 22.9% from the prior-year period. While its net income decreased 9.7% year-over-year to $454.20 million, its EPS fell 5.6% to $2.01. The company had $984.90 million in cash and cash equivalents as of January 29, 2022.
Past and Expected Financial Performance
Over the past three years, DG’s revenue and total assets have increased at CAGRs of 10.1% and 25.9%, respectively.
DG’s EPS is expected to grow 12.4% year-over-year in fiscal 2022, ending January 31, 2023, and 9.2% in fiscal 2023. Its revenue is expected to grow 9.3% year-over-year in fiscal 2022 and 5.9% in fiscal 2023. Analysts expect the company’s EPS to grow at a 10.9% rate per annum over the next five years.
DLTR’s revenue and total assets have increased at CAGRs of 4.9% and 17.2%, respectively, over the past three years.
Analysts expect DLTR’s EPS to improve 37.1% year-over-year in fiscal 2022, ending January 31, 2023, and 13% in fiscal 2023. Its revenue is expected to grow 6.1% year-over-year in fiscal 2022 and 5.8% in fiscal 2023. Analysts expect the company’s EPS to grow at a 19.3% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, DG is currently trading at 1.53x, 37.8% higher than DLTR’s 1.11x. In terms of forward EV/Sales, DLTR’s 1.60x compares with DG’s 1.77x.
Profitability
DG’s trailing-12-month revenue is almost 1.3 times DLTR’s. DG is also more profitable, with an 11.3% EBITDA margin versus DLTR’s 9.8%.
Furthermore, DG’s ROE, ROA, and ROTC of 37.1%, 7.7%, and 9.9% compare with DLTR’s 17.7%, 5.5% and 6.7%, respectively.
POWR Ratings
While DLTR has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, DG has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
In terms of Value, both DLTR and DG have a C grade for Value, consistent with their slightly higher-than-industry valuation ratios. DLTR’s 1.11x non-GAAP forward PEG is 15.5% higher than the 0.96x industry average. DG has a 1.53x non-GAAP forward PEG, 59.7% higher than the industry average of 0.96x.
DLTR has a B grade for Sentiment, consistent with analysts’ expectations of a solid increase in earnings. DLTR’s EPS is expected to grow 25.6% year-over-year to $2.01 for its fiscal 2022 first quarter, ending April 30, 2022. DG’s C grade for Sentiment is in sync with its lower earnings estimates. The consensus EPS estimate of $2.32 for DG’s fiscal 2022, ending April 30, 2022, represents a 17.7% decline from the prior-year period.
Of the 39 stocks in the A-rated Grocery/Big Box Retailers industry, DLTR is ranked #30, and DG is ranked #33.
Beyond what we have stated above, our POWR Ratings system has also rated DG and DLTR for Stability, Quality, Growth, and Momentum. Get all DLTR ratings here. Also, click here to see the additional POWR Ratings for DG.
The Winner
The growing demand for low-cost general merchandise at discount stores should allow DLTR and DG to profit substantially in the coming months. However, a relatively lower valuation makes DLTR a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Grocery/Big Box Retailers industry.
DG shares were trading at $222.62 per share on Thursday afternoon, down $4.85 (-2.13%). Year-to-date, DG has declined -5.43%, versus a -4.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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