Amid high inflation and aggressive policy tightening, the U.S. economy experienced a 0.9% decline in GDP growth in the second quarter, fueling recession fears. Moreover, deepening consumer spending is worrying retailers.
However, a steady demand for general merchandise is helping discount retailers, which offer products at relatively lower prices as compared to traditional retailers, witness increasing foot traffic.
Therefore, Dollar Tree, Inc. (DLTR) and Dollar General Corporation (DG) should stay afloat amid the volatile market conditions.
DLTR operates a discount variety store chain via its Dollar Tree and Family Dollar segments and sells an assortment of everyday general merchandise, including kitchen and dining, books, personal care, glasses, food carriers, gifts, and other household products.
On the other hand, DG operates a chain of discount retail stores that offers merchandise, including consumable items, seasonal items, home products, and apparel.
While DG gained 4% year-to-date, DLTR surged 16.2%. DLTR is a clear winner with 6.4% gains over the past month versus DG’s 0.6% returns. But which stock is a better buy now? Let’s find out.
Recent Financial Results
For the fiscal 2022 first quarter ended April 30, 2022, DLTR’s net sales increased 6.5% year-over-year to $6.90 billion. The company’s operating income came in at $731.50 million, up 40.7% from the year-ago period.
Its net income came in at $536.40 million, representing a 43.2% rise from the prior-year period. DLTR’s EPS came in at $2.37, indicating a 48.1% year-over-year improvement. As of April 30, 2022, the company had $122 billion in cash and cash equivalents.
DG’s net sales for its fiscal 2022 first quarter ended April 29, 2022, increased 4.2% year-over-year to $8.75 billion. The company’s gross profit came in at $2.74 billion, representing a marginal decline from the year-ago period. Its operating income came in at $746.16 million for the quarter, indicating a 17.9% rise from the prior-year period.
While its net income decreased 18.5% year-over-year to $552.66 million, its EPS grew 14.5% to $2.41. The company had cash and cash equivalents of $335.61 million as of April 29, 2022.
Past and Expected Financial Performance
Over the past three years, DLTR’s revenue, EBITDA, and total assets have increased at 5% CAGR each.
Analysts expect DLTR’s EPS to grow 41.2% in fiscal 2023, ending January 31, 2023, and 14.4% in fiscal 2024. The company’s revenue is expected to grow 7% year-over-year in fiscal 2023 and 5.9% in fiscal 2023. Its EPS is expected to grow at 16.6% per annum over the next five years.
Over the past three years, DG’s revenue, EBITDA, and total assets have increased at CAGRs of 9.8%, 12.6%, and 8.2%.
DG’s EPS is expected to rise 13.2% year-over-year in fiscal 2023, ending January 31, 2023, and 9.4% in fiscal 2024. The company’s revenue is expected to grow 9.9% year-over-year in fiscal 2023 and 5.8% in fiscal 2024. Its EPS is expected to grow at an 11.1% rate per annum over the next five years.
Valuation
In terms of forward EV/Sales, DG is currently trading at 1.86x, 16.3% higher than DLTR’s 1.60x. In terms of non-GAAP forward PEG, DLTR’s 1.10x compares with DG’s 1.53x.
Profitability
DLTR’s trailing-12-month revenue is 1.3 times that of DG’s. However, DG is more profitable, with a 6.6% net income margin versus DLTR’s 5.6%.
Furthermore, DG’s ROE, ROA, and ROTC of 37.3%, 7.3%, and 9.3% compare with DLTR’s 19%, 5.9%, and 7.3%, 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, consistent with their slightly higher-than-industry valuation ratios. DLTR’s 1.10x non-GAAP forward PEG is 0.4% higher than the 1.10x industry average. DG has a 1.53x non-GAAP forward PEG, 39.2% higher than the industry average of 1.10x.
DLTR has a B grade for Sentiment, reflecting impressive earnings growth expectations. DLTR’s EPS is expected to grow 86.5% year-over-year to $1.79 for the fiscal 2022 third quarter ending October 31, 2022.
DG’s C grade for Sentiment is in sync with its relatively lower earnings estimates. DG’s EPS is expected to rise 23.1% year-over-year to $2.56 for the fiscal 2022 third quarter ending October 31, 2022.
Of the 38 stocks in the A-rated Grocery/Big Box Retailers industry, DLTR is ranked #24, while DG is ranked #32.
Beyond what we have stated above, our POWR Ratings system has graded DG and DLTR for Growth, Stability, Momentum, and Quality. Get all DG ratings here. Also, click here to see the additional POWR Ratings for DLTR.
The Winner
Rising foot traffic at discount stores amid high inflation should help DLTR and DG stay afloat. However, DLTR is a better buy based on its lower valuation.
Our research shows that the odds of success increase if one invests in 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.
DLTR shares were unchanged in after-hours trading Friday. Year-to-date, DLTR has gained 17.68%, versus a -12.61% 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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