Dollar Retailers Stand Strong Despite Economy

Family Dollar Stores [[FDO]], Dollar Tree [[DLTR]], 99 Cents Only Stores [[NDN]] and other dollar retailers may be the last growing segment in retail. Family Dollar announced higher-than-expected earnings and boosted its outlook as more budget-conscious consumers flocked to the cheapest retailers in the market. Meanwhile, even discount retailers like Wal-Mart Stores [[WMT]] and Target Corporation [[TGT]] reported slower growth as the economy continues to take a turn for the worst.

Family Dollar reported first quarter profits that rose $59.3 million, or 42 cents per share, up 13.5% from the same quarter a year earlier. The dollar retailer also predicted that same-store sales would increase 3% to 5% with earnings per share between 48 cents and 52 cents during the second quarter. These numbers compare to Wal-Mart, which today announced cuts to its fourth-quarter earnings forecast while warning that its January sales may end up flat.

So, are the dollar retailers a buy at these levels? One of the best measures of value is the PEG ratio, which compares the price-earnings multiple to growth numbers. Family Dollar and 99 Cents Only Stores are currently trading with PEGs of around 1.40, which is in line with Wal-Mart but higher than the industry. Dollar Tree’s PEG ratio is a little more reasonable at 1.19.

Investors looking to take advantage of these values and outlooks may want to consider purchasing long-term options called LEAPS instead of stock. These options give investors the right, but not obligation, to purchase the stocks at a set price anytime over the next one or two years at a fraction of the cost. See “Using LEAPS as a Stock Substitute” for more information on this strategy.