Dollar General Vs Dollar Tree Stock: Which Is Best?

Dollar General vs Dollar Tree Stock: Investing in the companies that sell those goods people use every day is a strategy many investors use to play the market. The assumption is that consumers will still shop there, even when the economy is not performing well.

For some investors, this includes fast-food restaurants and department stores like Walmart. However, both of those industries sell items that can be considered “treats” and sales could fall off in a downturn. For instance, a family that is struggling may decide to skip on fast food or spend less on toys and clothes.

Investing in dollar store chains is a possible alternative. While their shelves are stocked with many impulse buys, these companies differentiate themselves by selling necessary items far below many of their rivals.

Cost-conscious customers frequent those places looking for bargains and a way to save money without changing their lifestyles. But which is best between Dollar General vs Dollar Tree stock? First you need to know how these dollar stores differ.

About Dollar Stores

There are two main companies operating in this space: Dollar Tree [NASDAQ: DLTR] and Dollar General [NYSE: DG]. Their names are very close, but they have very different approaches.

Dollar Tree has stores that sell everything for $1. Its goods are cheap and cheerful. Candy and toys are a top seller. In contrast, most of the items at its rival Dollar General are over $1. While they have certain deals, Dollar General is more focused on consumables.

However, Dollar Tree is more than a dollar store. The company owns a dollar store chain called Family Dollar. This brand is very much like Dollar General [NYSE: DG]. They have a similar strategy and sell a common range of products.

Let’s look at each company in turn to get a better idea of whether they would make good additions to your portfolio.

Should You Invest in Dollar Tree Stock?

Dollar Tree [NASDAQ: DLTR] had 15,237 locations at the end of its fiscal 2018. Around 8,200 of those stores are Family Dollar locations.

Dollar Tree purchased Family Dollar in 2015, making it one of the largest discount retail chains in North America. This strategy allows the company to enjoy certain economies of scale and other synergies – or at least it will.

For now, Dollar Tree is aggressively trying to pursue growth and the Family Dollar acquisition is only part of it.

Dollar Tree [NASDAQ: DLTR] is in the process of spending money to renovate locations and improve store offerings at Family Dollar locations.

This includes adding Dollar Tree-type offerings and expanding the number of coolers in use. The company is also in the process of adding freezers and refrigerators to its Dollar Tree locations in an effort to increase the range of items offered.

However, Dollar Tree is also shuttering some of its locations. The company is closing many of its stores in anticipation of tariffs.

Many of the goods that Dollar Tree sells so cheap come from China and other points abroad – around 42 percent. If tariffs reach 25 percent, Dollar Tree would have to cut its already low margins or start charging more than $1, which could hurt its brand image.

Is Dollar General a Buy?

Dollar General may not be as diversified as Dollar Tree [NASDAQ: DLTR], but the company still has lots going for it. It has more stores – 15,472 – and a single focus.

Dollar General tries to position itself as offering a time-saving shopping experience, so it takes pains to develop convenient locations. Because of this, real estate is extremely important. If the company finds that it cannot get the right locations at the right price, it could miss out on market share.

Approximately 77.5 percent of the items Dollar General [NYSE: DG] sells falls under the consumables label. From there, 12 percent of the company’s sales are on seasonal items, roughly 6 percent is from home products and just under 5% is on apparel.

The company has been trying to develop private brands to help improve its gross profits, but this strategy carries big risks. If customers do not like the product or Dollar General cannot price the product low enough, the company could lose customers.

Pros and Cons of Investing in Dollar Store Chains

When you invest in a dollar store chain, you are essentially betting on the idea that people want bargains and that they are willing to drive to a dollar store location to buy these items as opposed to ordering online.

The pro here is that the potential market is huge. Dollar stores make it easy for customers to get many of their daily necessities in a single trip (Think toilet paper, dog food, snack cakes, and milk) or get a treat (e.g. candy, toy) without breaking the bank.

These retail chains also tend to keep a modest footprint – just enough to house all of the items it carries but not so big as to make a shopping trip to one of its locations cumbersome.

There are several cons to this. For one, consumers may instead opt to order what they want online and skip the dollar store altogether.

As the Walmarts and Amazons of the world start to improve delivery time and pricing (and the rest of the world becomes increasingly comfortable shopping online), it is very likely that dollar store chains could lose some market share.

Investing in dollar store chains also comes with another important risk factor – margins. Selling items so low means that these companies are competing on price and they need to sell high volumes to make it worth their while.

Ordering too much of something or incorrectly predicting a trend could erode company profits. Further, dollar stores may not have the same lasting potential as retail chains, like Walmart, that have been around for a longer period of time.

Dollar General Vs Dollar Tree Stock: The Bottom Line

Over time, Dollar General [NYSE: DG] and Dollar Tree [NASDAQ: DLTR] are likely to start offering some online services but that will take time and resources that may or may not pay off.

For now, these two discount retail giants are competing on a level field. Investing in Dollar Tree says that you believe the company will be able to recoup its investment in Family Dollar and the modernization of its locations.

In contrast, investing in Dollar General means that you believe the company’s gamble on private brands will make the difference.