Retail Rumble: Dollar Tree vs. Family Dollar  

Which dollar store stock is the better Black Friday buy?
My first encounter with a dollar store was more than 20 years ago, and it was a bad one.
I thought everything in the store was junky. The soaps were gross and didn’t clean. The sponges turned to dust after a day. The air freshener smelled worse than my garbage.
Too bad for me, because that took dollar store stocks off my radar for the next dozen years. Since then, dollar chains have taken off, and I missed out on a great American success story. They finally caught my attention again when the financial crisis drove people searching for bargains into the stores.
Dollar stores have only gotten better since. They moved into brand-name goods that came in smaller sizes, so now the tomato sauce actually tastes good and the soaps actually clean things.
They’ve since taken on the grocery stores by offering a variety of foods, including produce and refrigerated items. That put the squeeze on traditional grocers.
With the labor force participation rate at a 30-year low, and the economy still struggling amidst flat wages and increasing inflation, dollar stores are still thriving.
There are two primary large dollar-store chains that are publicly traded: Dollar Tree (NASDAQ: DLTR) and Family Dollar (NYSE: FDO). Which is the better buy? When you compare the two, it’s not even close.

Market Cap 12.75 B 9.00 B
Employees 17,600 35,000
Revenue (TTM) 8.15 B 10.49 B
Rev/Employee 463,000 300,000
Gross Margin (TTM) 35% 34%
Operating Margin (TTM) 12% 5%
FCF (TTM) 570MM 33MM
Net Cash 267MM 190MM

I can’t say I expected this degree of disparity. Dollar Tree wins on every metric, and does so resoundingly. Maybe if we parse the numbers further, we can figure out why Carl Icahn owns Family Dollar shares? Not likely.
Family Dollar has 8,100 stores, while Dollar Tree has 5,100 stores. Theoretically, Family Dollar should only have 60% more employees. Instead, they have 100% more. That immediately makes me wonder if Family Dollar is over-staffed.
Even worse, however, is that Family Dollar generates a third less revenue per employee than Dollar Tree does. That’s a terrible comparison, and a reason why operating margins at Family Dollar are less than half the margins at Dollar Tree.
The way each company uses its capital is also telling. Dollar Tree’s operations are obviously far more efficient since they generated $570 million of free cash flow in the last 12 months. Meanwhile, Family Dollar is barely producing any free cash flow at all.
The balance sheets are fairly comparable, with net cash about equal and long-term debt roughly the same at each company.
On a valuation basis, Dollar Tree’s EPS growth is pegged at 14.6% annualized over the next five years. The stock trades at $62 on FY14 EPS of $3.02, giving it a current P/E of 20.6. For FY15, the PE ratio is 18, based on EPS of $3.50.
Over at Family Dollar, EPS growth is pegged at a meager 6.2% annualized over the next five years. The stock trades at $79 on FY14 EPS of $3.09, giving it a current P/E of 26. For FY15, the PE ratio is 23, based on EPS of $3.44.
I am utterly mystified as to why Family Dollar’s suitors value the company as they do considering the miserable metrics it has. With Black Friday just over a week away, to me Dollar Tree is clearly the better buy.

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