While today's announcement of an acquisition puts 99 Cents Only Stores (NYSE:NDN)
in the spotlight, savvy traders are already thinking 'bigger picture'. Taking the clue from the Ares buyout of NDN, investors are now trying to decide which among Dollar General Corp. (NYSE:DG), Dollar Tree, Inc. (NASDAQ:DLTR),
and Family Dollar Stores, Inc. (NYSE:FDO)
are the next corporate targets. After all, M&A within an industry tends to come in waves - now that the pickin's are getting slim, the scramble for the next-best acquisition will begin in earnest. Here's a closer look at the three next likely targets now that the 'value store' search is on.
Family Dollar Stores, Inc. isn't exactly an apples-to-apples comparison in that not everything in the store is priced at less than one dollar. It's the same premise though, and the same target market and demographic. Currently pierced at $53.95 per share, FDO is a $6.8 billion company that's put up a whopping $8.4 billion in sales over the past twelve months. It's net margin is a modest 4.6%, and it's got $357 million in cash (or near cash) the bank.
Dollar General Corp. is more in the same vein as Family Dollar Stores in that it aims to be a one-stop grocer/general merchandiser, rather than simply offering what it can for $1.00 or less. Again though, it's the same basic aim, and same target market. DG is a little more pricy though, at $13.3 billion, though it also generated $13.7 billion in sales over the past four quarters. Profit margins here are 4.7%, and Dollar General Corp. has $113 million in the bank (though it has another $142 million in what it's calling 'other current assets').
Finally, the most-similar to 99 Cents Only Stores is the Dollar Tree, Inc., where all of its merchandise is priced for $1.00 (or less) per item. DLTR is much bigger though, at $9.8 billion. It's generated $6.2 billion in revenue for the past twelve months, but has cleared 7.2% of that as profit... the best net margin among the three discounters in question. Dollar Tree also is sitting on $339 million in cash - the biggest cash holding among all three potential acquisition targets, despite DLTR being the smallest of them.
And the winner is? If any of them are to be acquired, Dollar Tree, Inc. looks first in line. It's the cheapest, and also the most profitable on a net margin basis.
Yes, all the margin factors are low, but that's the nature of the beast in low-ticket retail. It's more of a volume-oriented operation, and there's nothing inherently wrong with Family Dollar Stores and Dollar General Corp. because of slim margins. On the other hand, those lower margins don't make an acquisition all that enticing unless a buyer knew exactly how to squeeze more out of them, or knew how a particular synergy was going to be created. With Dollar Tree, it's more of a turn-key situation with meaningfully more profit cushion.