Should You Buy Dollar Tree or Dollar General?

Dollar General and Dollar Tree has had meaningful dips of more than 18% after their Q2 results. What could be the reasons behind the big drops? Are they priced at attractive valuations or should you avoid them altogether? If they’re attractive, which is a better buy today?

Both Dollar General Corp. (NYSE:DG) and Dollar Tree, Inc. (NASDAQ:DLTR) released their Q2 reports on August 25. The results caused Dollar General to drop 17.6% and Dollar Tree to fall to a smaller extent of 10% from the previous day’s close.

However,  since August 26, Dollar General’s price action has more or less aligned with that of Dollar Tree’s. So,  the Q2 results seems to have had a bigger impact on Dollar General than on Dollar Tree.

What were the Q2 results?

Dollar Tree had higher growth in same-store sales and net sales compared to Dollar General. Dollar Tree’s acquisition of Family Dollar really boosted its net sales growth.

Even after expanding its pie by acquiring Family Dollar, Dollar Tree still posted lower sales and net income than Dollar General. Dollar Tree’s Q2 net sales and net income were $5 billion and $268.2 million, compared to Dollar General’s $5.39 billion and $307 million. So, Dollar General had a higher profit margin than Dollar Tree (5.7% compared to 5.36%).

High multiples before reporting Q2

Before releasing the quarterly reports, the discount retailers were trading at high multiples. Dollar General traded at a P/E of 22.4 at the end of July. Dollar Tree was even more outrageous. It had a P/E of 31.7 (as shown below). So, even before the Q2 results, both companies were already paring off from their all-time highs.

Valuations now align more with growth estimates

Based on analyst estimates, Dollar General and Dollar Tree are anticipated to grow their EPS by 12.9-13.7% and 18.9-20.7% per year, respectively…

This is primarily an excerpt from my article on Seeking Alpha. Read the full article here: Why Has Dollar General Fallen Harder Than Dollar Tree?

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Disclosure: At the time of writing, I own shares in DG.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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