Top Investment Option Now: Dollar General versus Five Below Compared
Discount Retail Wars: Dollar General vs. Five Below
Both Dollar General (DG, -0.38%) and Five Below (FIVE, -1.61%) have experienced significant losses, with over 40% of their value vanishing within the past year. Factors like escalating costs, tariff fears, and fierce competition in the budget market have been major contributors. But could one of these discount retailers also be a golden opportunity for value investors? Let's delve into their unique selling propositions, growth rates, and valuations to determine.
Dollar General and Five Below: A Closer Look
Over the years, inflation and higher tariffs on imported goods have forced both retailers to reconsider their pricing strategies. Today, Dollar General sells approximately 20% of its merchandise at the traditional $1 price point, while the remaining items are priced higher. Five Below still sells many products within the $5 range, but they began easing into the "Five Beyond" ($5-$10) spectrum five years ago.
Dollar General primarily focuses on selling essentials such as housewares, cleaning supplies, food, health & beauty products, clothing, and other household necessities. With a strong presence in underserved rural areas, the company boasts a broader reach than its main competitor, Dollar Tree.
Five Below, on the other hand, offers a broader selection targeting younger consumers – toys, fashion accessories, candy, stationery, decor, smartphone accessories, and more. The company's stores are spread across urban, suburban, and semi-rural areas.
The Race to Growth
From fiscal years 2018 to 2023, Dollar General saw its net sales grow at an impressive compound annual growth rate (CAGR) of 9%. During this period, its year-end store count jumped from 15,370 to 19,986 locations, and earnings per share (EPS) rose by 5%. Despite challenges faced by the retail market, Dollar General continued expanding.
During the same time frame, Five Below displayed even quicker growth with a CAGR of 18% in net sales. Its year-end store count doubled from 750 to 1,544 locations, but EPS growth was less robust compared to Dollar General's, with a CAGR of 15%. Five Below only reduced its share count by 1%.
For fiscal year 2024, Dollar General predicts a 1.1% to 1.4% same-store sales growth, a 4.8% to 5.1% net sales increase, but a 22% to 27% potential EPS decline due to hurricane-related expenses in the second half of the year.
Five Below expects a 3% contraction in its same-store sales and an 8% to 9% net sales growth for fiscal year 2024. The company anticipates a 16% to 20% drop in EPS due to inflationary pressure on product prices and wages. Despite this, Five Below plans to open 227 new stores for the full year.
The Valuation Game
Dollar General trades at 12 times forward earnings and offers an enticing forward dividend yield of 3%. These factors provide a cushion to stop the potential downside, but investors may hold off until it fully resolves employee safety issues, regulates hurricane-related expenses, and demonstrates consistent growth despite increased tariffs.
Five Below looks pricier at 22 times forward earnings and does not offer a dividend. However, it enjoys stronger growth prospects and lacks employee safety dilemmas. It comes with tariff-related uncertainties, but catering to younger shoppers might grant it faster expansion and diversification.
In conclusion, Dollar General showcases a robust store footprint, cost-cutting strategies, and customer loyalty. Five Below offers a broader product range but faces challenges with its expansion and growth metrics. Ultimately, the choice between Dollar General and Five Below depends on each investor's risk tolerance, expectations for market clarity, and belief in the impact of inflation and tariffs on both retailers.
- Despite facing challenges due to inflation, higher tariffs, and fierce competition, some analysts view both Dollar General and Five Below as potential investment opportunities in the finance sector.
- In the past five years, Five Below has expanded its product offerings to include items priced beyond $5, aiming to appeal to a broader demographic and increase its market share.
- In terms of financial performance, Dollar General has shown robust growth in net sales and store count, while Five Below has exhibited even stronger growth, but its EPS growth rate is lower than that of Dollar General.
- If you are an investor with a higher risk tolerance and believe that Five Below's potential for faster expansion and diversification through catering to younger shoppers outweighs the tariff-related uncertainties, you might consider investing in Five Below's stocks, which currently trade at a higher forward P/E ratio but do not offer a dividend.
