Ethan Allen, Dollar General Feel Just Right

You know, when I was a kid I hated looking for furniture with my parents. I promised myself that when I grew up I'd never march my kid through stores for hours on end looking for "just the right lamp," as Mom always said.

But in the last few months I've started schlepping my daughter down to the very store where my parents dragged me 20 years earlier. That store? A branch of the 70-year-old furniture seller Ethan Allen (ETH).

My point is that in spite of all the doom and gloom in the market, some companies continue to fire on all cylinders. Today I'm thinking about two very different retailers -- Ethan Allen and Dollar General (DG).

The companies couldn't be much more different, really. Deep discounter Dollar General is at the bottom of the retail food chain, while Ethan Allen is far more upscale. But what makes both stocks interesting is their combination of solid operating performance and conservative valuation.

Take Dollar General. Unlike many rivals, it continues to turn in monthly same-store sales gains in the mid-single-digit range. The company plans to expand its store base by about 10% annually, so the stage is set for some serious earnings growth. Plus, the company is expanding into the grocery business, which should draw in more traffic.

Hold your horses, folks -- I know what you are thinking. How does my bullishness on Dollar General wash with optimistic comments that I've made about discounters in the past, including Family Dollar (FDO)?

Well, the answer is simple. Although both companies share some territorial overlap, Dollar General's store footprint is concentrated primarily in the Southeast and Midwest, whereas Family Dollar has a huge presence in some Western states including Texas. I believe there's room enough for both to grow without stepping on each other's toes.

And think about this. Dollar General trades at just one times sales and less than five times book value -- and the company is expected to grow its earnings at 15% or better for the next five years.

That really gives you some room to grow. So does Ethan Allen, which is a company you associate more with staying power than with fabulous growth. (Note: Ethan Allen is a member of my newsletter's model portfolio.)

I related that touching story at the start of this column because it shows how Ethan Allen, unlike many of the mom-and-pop furniture stores that dot our nation's malls, has something that's worth its weight in gold in retail: a brand name.

And Ethan Allen has something else that few other furniture shops do -- purchasing power. It runs more than 300 stores and owns 17 manufacturing plants, giving it enormous leverage with its suppliers.

This leverage enables the company to enjoy an operating margin of more than 13%, which is more than double that of peers including La-Z-Boy (LZB) and Furniture Brands (FBN).

The company plans to increase its store base by about 4% over the next year. Coupled with a single-digit increase in booked orders (which include wholesale orders and retail sales that have been written up but not yet shipped), that growth should allow the company to report low double-digit revenue rises over the next year. In spite of the struggling economy, Ethan Allen continues to deliver.

So looking for a good retail stock can be as easy or as hard as you want. Just don't feel like you have to drag your kid along for the ride.

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