Thursday, 10 September 2015

Downturn Fears: Should You Own Wal-Mart Or Dollar General?

Discount retail stores perform well during low times. Consider Wal-Mart for its strong cash flow, dividend and neighborhood stores. Avoid Dollar General amid increasing competition. The market has been in a bearish mode for some time now. Volatility has been favoring the downside for the past few weeks. The bearish trend is justified on some level given the lofty valuation of the technology sector, but it's not fair to blame it on technology alone. Oil prices have been hurting the energy sector while materials are being affected by fears related to a global economic slowdown. However, retail can be a good place to be in during an economic downturn. Discount retailers are a good place to start. 

Dollar General can grow its sales given the unique nature of its business model. The company is mostly witnessing growth through the opening of more locations. Eventually, the growth will halt as cannibalization comes into play. Wal-Mart, Target, Amazon and Dollar Tree will put pressure on the top-line growth of Dollar General as switching costs are zero. Brand recognition will be key for sales growth, and we believe Wal-Mart will outperform Dollar General in a heartbeat in a given neighborhood. Yes, Wal-Mart is lagging in terms of small-box footprint but it has the resources to materially hurt the sales of Dollar General's stores. In the past, hyper retailers were focused on supermarkets but the shift in strategy is getting clearer, which is the biggest threat to Dollar General. Given the stock is fairly priced, we think investors should not take the risk of confronting the competition. All in all, we favor Wal-Mart over Dollar General in discount retail.