Which Dollar Store, If Any, is Worth Your Investment Dollars? Dollar stores are effectively capturing retail dollars, but does that make them good investments? And if so, which one may be worth buying now?

Dollar stores have been winning the battle for retail dollars for the last few years. Since the onset of the global Covid-19 pandemic, dollar stores saw significant increases in foot traffic. Some of the biggest names in this space are Dollar General Corp. (NYSE: DG), Dollar Tree Inc. (NASDAQ: DLTR), and Five Below, Inc. (NASDAQ: FIVE).

According to the analytics firm Placer.ai, Dollar Tree and Family Dollar posted year-over-year (YOY) growth in foot traffic of 10% and 18% respectively. Dollar General posted a small decline.

One catalyst for dollar stores is their location. Many of these chains position themselves in small towns and more rural locations that large retailers such as Walmart Inc. (NYSE: WMT) will shy away from due to low population density.

But while these stores effectively capture retail dollars, does that make them good investments? And if so which one may be worth buying now?

Pay Attention to the Guidance

Many dollar stores will report quarterly earnings in the next few weeks. Dollar General previewed their upcoming earnings on February 23, and the market responded harshly.

The company reported market share gains in both consumable and non-consumable products. That being said, same-store sales growth for the quarter reached 5.7%. That number was below the consensus expectation of 6.6%.

Furthermore, Dollar General lowered their earnings per share (EPS) expectations to $2.91 to $2.96 versus previous guidance of $3.15 to $3.30 and a consensus estimate of $3.26.

And Dollar General's competitors face similar headwinds. In January, one analyst issued a rare Sell rating on Dollar Tree stock citing margin pressure as consumers shift towards low-margin consumer products.

Inflation Remains a Problem

Inflation isn't just affecting the consumer. Dollar stores are dealing with higher labor costs. That is eating away at an advantage that dollar stores had over competitors. That is, the ability to bring national buying power to remote locations while offering a low labor and operations cost.

The latter part of that thesis is being tested. And many of these companies have large expansion plans for 2023 that are also likely to pressure earnings. Data from Placer.ai states that Five Below is planning to open 200 new stores this year and Dollar General is expanding its Popshelf concept to 300 locations this year.

The Winner Is …

Dollar General stands out to me for a few reasons. First, the store is aggressively opening several stores in 2023. To be fair, they're not the only dollar store doing this. But I've written before about Dollar General's intentional model to be where their customers are likely to be.

Second, if the company hits even the low end of its current earnings guidance, it will post YOY earnings growth of about 4%. And if the company hits the average of analysts' guidance for the next four quarters, it will post a 14% gain.

But here's where I believe the third reason to buy DG stock comes into play. Let's say the earnings recession continues. Dollar General's EPS could come in around 9% lower than expected at the pace of their just-released earnings. But even if we go conservatively to 10%, they still would post a 3% YOY gain.

And you get a dividend that yields about 1%. That's an outstanding dividend, but with a payout ratio of around 19%, it's sustainable and could have some room to go higher.