FDO comments from SmartMoney article....
October 30, 1998
Dow Jones Newswires
SMARTMONEY ONLINE: Two Retailers Worth A Dollar
Dow Jones Newswires
This story originally was published Thursday
By Joshua Albertson
SmartMoney Interactive
NEW YORK (Dow Jones)--Amid all of the talk of slowing consumer spending and impending recession, October has been a lovely month for discount retailers. Even as the Conference Board weighs in with reports of declining consumer confidence for the fourth straight month, K Mart (KM) is up 25.5%, Wal-Mart (WMT) has jumped 23.8% and Costco (COST), 25.1%.
It's no wonder, then, that two deep discounters, Dollar Tree (DLTR) and Family Dollar (FDO), made it through this w eek's Earnings Revision Screen.
They were joined on the list by a couple of other retailers that seem to be poised to weather the economic storm, Gap (GPS) and Best Buy (BBY). For now, though, we'll focus on the pair of Dollars.
Year-to-date, both stocks have outpaced the S&P 500. While the index has gained 10.1%, Family Dollar has picked up 15.6% and Dollar Tree has climbed 39.6%.
The lesson here is not that the word dollar in a company name elicits Group (DTG) is down 38% for the year.) But that's not far from the truth. As consumer confidence numbers continue to wane, buyers seem much more likely to shell out one dollar for their shopping needs than, say, a thousand. And that translates into an investment opportunity.
Unfortunately, neither Dollar Tree nor Family Dollar are particularly cheap right now. DLTR trades at 31 times calendar 1999 earnings estimates and FDO, at 22 times. But both stocks are more than 20% off their 52-week highs and are in fundamentally attractive positions.
True to its name, Dollar Tree sells all of its merchandise for $1. That might sound like a no-win, no-margin situation, but the company's net margin of 8% tops the industry average of 2.1% by a long shot.
The secret to the company's pricing success? The company's clerks rarely have to make change? No, that's not it. It's direct importing from Asia.
Dollar Tree employees scour the region for products that will move on American shelves, and the company ship s them home without having to pay a middle man. Ailing Asian economies have only added to the values.
Analyst Rick Nelson of Stephens estimates that the company directly imports 40% of its products, with the bulk coming from Asia. And he doesn't see the opportunities drying up anytime soon. "They're looking at getting some great buys at least through the first half of 1999," says Nelson.
At home, the company seems oblivious to the ills afflicting its retailing brethren. In fact, it stands to reason that the company's customer base will expand, not constrict, as spending gets tighter. Customers who used to spend $2 on their favorite items might find the $1 tags alluring. "I think if there's one retailer that isn't going to see slower volume due to consumer confidence, this is the one," says Cody McGarraugh of Scott & Stringfellow.
DLTR stock took a hit this summer when concerns arose over a container shortage in Asia. But McGarraugh says that the company was able to transport enough goods in ad vance to avoid shipping problems. That has swelled inventory levels to unusually high levels leading up to the Christmas season, but McGarraugh thinks the company was smart to get their goods when they could. "I always tell people that we'll look back and say this was another brilliant thing they did," he says.
Despite his fundamental bullishness, McGarraugh thinks the stock has gotten a little ahead of itself and has it rated a Hold. But seven of the eight other analysts who track the company consi der the stock a Strong Buy and even McGarraugh joins the others in forecasting 25% to 30% earnings growth over the long term.
The growth outlook for Matthews, N.C.-based Family Dollar is nearly as strong. Analysts expect a 22% gain in fiscal 1999 (ending in August) and a 25% boost in 2000. And although the company has the audacity to charge more than a dollar for some of its goods, buyers seem to be responding to the low-cost retailer. Same-store sales soared 12.3% in September, on top of 10.5% gai ns in August.
Those numbers alone would be enough to turn some heads, but the company is also a compelling expansion story. More than 1,500 new stores have gone up during the past 10 years, bringing the total count over 3,000, and the company says that 350 to 400 more will go up in 1999. And as is the case with Dollar Tree, the rising volume can only help keep incremental costs down and margins up.
Three years ago, the company altered its pricing structure from intermittent promotional pricing to every day low pricing and store traffic continues to increase as a result. That strategy should continue to serve the company well, should the economy continue to waffle. "We think even in more difficult economic times we should be relatively well positioned," says a company spokesperson.
Despite the economic gloom and doom, consumer confidence may very well return to vogue. After all, the most recent Conference Board numbers do not include the Fed's Oct. 15 rate cut and the subsequent market healing . And today's market seems much more stable than it did during the seesaw days of very recent past.
But as long as we've still got one foot in the woods, it seems like a safe bet to invest in a couple of Dollars.
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