More Dollar Store Insanity

There must be something in the atmosphere at dollar stores that induces insanity and stupidity in executives. The New York Post is reporting that Dollar General Corporation (NYSE: DG) would have to sell or shut down 4,000 stores if it were to acquire its ailing archrival Family Dollar Stores Inc. (NYSE: FDO).

That means Dollar General would have to get rid of over one third of its stores if it went through with a hostile takeover of Family Dollar. Dollar General currently has around 11,500 stores in 40 states, according to its website. The nation’s largest dollar store operator would have to make that move in order to avoid anti-trust action from the Federal Trade Commission, according to The Post.

Getting rid of all those stores would be a really dumb move because Dollar General is actually making money and doing really well right now, according to the financials. With those locations, Dollar General reported the following numbers, which are definitely attractive from a value investor’s point of view:

• An operating cash flow of $1.22 billion
• A leveraged cash flow of $853.04 million
• A Revenue of $18.12 billion in July 2014
• A quarterly year to year revenue growth rate of 7.5%
• A quarterly year to year earnings growth rate of 2.4%
• A return on assets rate of 10.09%
• A return on equity rate of 20.01%
• A profit margin of 5.7%
• An operating margin of 9.59%
• A diluted TTM EPS of 3.30
• Growing revenues: Dollar General reported a TTM revenue figure of $16.8 billion in July 2013 that grew to $18.12 billion in July 2014 without Family Dollar.

Dollar General is doing well right now, but the geniuses at its headquarters have figured out how to wreck the company: spend a fortune acquiring a failing rival for no reason. Worse, that acquisition would require them to essentially gut a successful existing business for dubious gains.

In fact, Dollar General wants to pay $80 a share for Family Dollar, which was trading at $78.98. Family Dollar is a company that has lost money because of over expansion and has been forced to start closing large numbers of stores—nearly 400. The closures were reported by a revenue loss of 6%.

Family Dollar’s management has been trying to sell the company to another rival, Dollar Tree Stores (NASDAQ: DLTR). Like Dollar General, Dollar Tree has been doing fairly well on its own. Its TTM revenue grew from $7.87 billion in July 2013 to $8.151 billion in July 2014.

Dollar Tree and Dollar General need Family Dollar and its problems like they need a hole in the head. Unfortunately, that appears to be exactly what their corporate leadership seems to have.

The dollar store operators would be better off if their leadership would concentrate on fending off aggressive competitors such as drugstore operators Walgreens (NYSE: WAG), Costco Wholesale (NASDAQ: COST), and CVS Health (NYSE: CVS) and super grocer Kroger Co (NYSE: KR). Walgreen, Kroger, and CVS have all been growing at a much higher rate than the dollar stores. Kroger alone reported revenue of $103.88 billion on July 30, 2014, up $5.37 billion from July 2013, when it reported a TTM revenue of $98.51 billion. Walgreen reported a revenue of $76.39 billion on Aug. 31, 2014.

Part of the reason why Kroger, Costco, and Walgreens have been growing is that they can offer a far greater selection and prices comparable to the dollar stores. Another is that they can offer a wide variety of amenities the dollar stores cannot, such as gasoline, banks, fresh vegetables, and pharmacies at those prices. The strategy is working as the revenue growth at Kroger demonstrates.

One just has to wonder how the dollar stores can survive with their executives so obsessed with mindless acquisition. The market is changing and moving beyond them, yet like sharks on a feeding frenzy, they’re more interested in consuming each other than seeing the big picture.

If you’re interested in small box retail, buy Walgreens and stay away from the dollar stores for now. Although, Dollar General might be a good investment, if its executives get off this imbecilic acquisition kick and learn to concentrate on growing their core business.

Disclosure: The author is long on Kroger.