Dollar Tree and Dollar General both reported their fourth-quarter earnings recently, March 13 and 14, respectively, but both companies – while seemingly similar in their business models – are dealing with various sets of challenges.
Check Out: I’m a Financial Advisor: These 5 Index Funds Are All You Really Need
Read Next: 5 Genius Things All Wealthy People Do With Their Money
According to Peter C. Earle, senior economist at the American Institute for Economic Research, investors comparing these two firms can look at a handful of differentiating features.
“Comparing the gross profit margins of each gives an idea of how efficiently the two translate revenues into profits, and higher margins equate to better management of costs and possibly more pricing power in the market,” he said. “Both of those, over time, mean higher earnings, which in turn tends to mean higher stock prices.”
In addition, Earle noted that for retail firms such as these, those with a higher store count and a broader geographic presence are likely to have better prospects for medium- to long-term growth – in addition to being diversified against regional/state issues.
“A very general rule of thumb is to compare store sales growth, which is to say the revenue increase for stores that have been open for one year or longer,” he added, noting that comparing store sales growth between two firms can reveal whether one is generating growth by organic measures as opposed to simply opening as many new locations as possible.
In turn, which stock is a better investment?
Dollar Tree
According to the earnings report, Dollar Tree reported a net loss of $1.71 billion, or $7.85 per share, in the quarter that ended Feb. 3. In comparison, a year-ago profit was $452.2 million, or $2.04 per share, according to CNBC.
The company also announced on March 13 that it would close 600 Family Dollar stores in the first half of fiscal 2024, and 370 additional stores as their leases expire, as GOBankingRates previously reported.
“Persistent inflation and reduced government benefits continue to pressure the lower-income consumers that comprise a sizable portion of Family Dollar’s customer base,” CEO Rick Dreiling said on a call with analysts, according to the transcript.
CFRA Research’s opinion is Sell, according to a March 16 research note.
“While the Dollar Tree banner continues to exceed expectations, the Family Dollar banner continues to underperform in several metrics,” Equity Analyst Arun Sundaram, CFA, CPA, wrote in the note.
In addition, CFRA expects FY 25 to be another challenging year.
“DLTR’s decision to close about 1,000 underperforming Family Dollar stores raises questions about the long-term growth of this banner,” added Sundaram.
Dollar General
For the fourth quarter-ending Feb. 2 – net sales decreased 3.4% to $9.9 billion, compared to $10.2 billion in the fourth quarter of fiscal 2022, according to the earnings report.
CFRA Research’s opinion on the stock is that it should be bought, according to a March 16 note.
Here, Sundaram argued that while the last few years have been challenging for DG, given weak macroeconomic conditions and some self-inflicted wounds, “we believe the company, which is being re-led by CEO Todd Vasos, is on the right track.”
“Staffing and inventory levels have already improved, and the goal for FY 2025 will be to address shrink and realize supply chain efficiencies,” said Sundaram. “We see further upside should the macro environment improve and discretionary sales rebound.”
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Dollar Tree vs. Dollar General Stock: Which Is a Better Investment?
