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Where Dollar General Has Dollar Tree Beat

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Dollar Tree  (DLTR)  may have shown huge signs of improvement on earnings, but Dollar General is still winning the war, as evidenced on its earnings report. 

Dollar General  (DG)  shares fell 1% to $183 apiece after an impressive quarter, as the stock had run up about 15% for the year into earnings and trading at a rich valuation, historically. 

Dollar Tree also had an impressive quarter, proving to investors its Family Dollar segment can impress. The stock, battered and down for the year into earnings — and trading at a substantial discount to Dollar General — rose 12% to $98 a share. 

Here were the headline results versus estimates for Dollar General:

  • Revenue: $8.5B v. $7.5B (result: +27% year-over-year)
  • Same-store-sales: +21% 
  • Earnings per share: $2.56 v. $1.74 (+73%) 

Here were the headline results versus estimates for Dollar Tree:

  • Revenue: $6.29B v. $5.81B (+8%)
  • Same-store-sales: +7% (Family Dollar sss: +15%)
  • EPS: $1.04 v. 85 cents (-8%) 

The similarities were that both companies saw a surge in demand from the consumer stockpile move during lockdowns, a broader tailwind for household products, groceries and consumer staples businesses during COVID-19. Another similarity was that both companies incurred health and safety costs that represented a notable portion of revenue. Both companies drove up operating leverage, working down costs like selling, general and administrative as a percent of revenue. 

But Dollar General overcame the safety cost headwind and then some, while Dollar Tree couldn’t. 

Dollar Tree’s weaker same-store-sales result is an ongoing theme between the two companies, a trend that makes the road to a higher operating margin a bit harsher for Dollar Tree. 

But Dollar General also called out strength in product categories that have some discretionary tilt. Apparel was one such category in the quarter. Discretionary items can often carry higher price tags and support margins. Dollar General’s gross margin expanded 5 basis points year-over-year to 30.7%. And its operating margin expanded considerably, moving from a round 7% last year to 10%. 

Dollar Tree, which has received some pressure from investors and analysts to boost its discretionary business, said that easter sales were poor and markdowns across categories rose. Dollar Tree’s gross margin fell 2 basis points to 28.5%. And its operating margin fell to 5.8% from 6.6%. The company also saw a slightly higher tax rate over last year. 

These differences were key factors contributing to why Dollar General grew profits, while Dollar Tree didn’t. Dollar General has recently bee a far more efficient business, able to grow faster, the main reason the stock fetches a higher earnings multiple than Dollar Tree does. Importantly, Dollar Tree investors, while noting that the company saw a shrinking profit amidst a Coronavirus demand tailwind, are encouraged at the apparent strength in the business revealed by the pandemic, strength that hasn’t been very visible in past quarters. 

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