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Wolfe Research Thinks Dollar General Deal Is Wal-Mart's Least-Favored

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Dollar General (NYSE: DG) sweetened offer to dominate the deep-discount retail market offers the strongest competition for Wal-Mart (NYSE: WMT), an analyst said Tuesday.

Dollar wants win a bidding war with Dollar Tree (NASDAQ: DLTR) for Family Dollar Stores (NYSE: FDO). Regardless of immediate shareholder value concerns, Wolfe Research's Scott Mushkin thinks Dollar General's deal makes the most strategic long-term sense.

Wal-Mart, which has seen seven straight quarters of declining traffic at its U.S. stores, directly challenged the dollar-store segment when announced in February that it will more than double its expansion plans for its 400 Neighborhood Markets. The smaller stores are about 20 percent the size of the 3,300 Wal-Mart "super centers."

Dollar stores, drug stores and warehouse clubs are increasingly winning market share at Wal-Mart's expense. A combined Dollar General-Family Dollar will be best able to compete with Wal-Mart's small format stores, Mushkin said in a note Tuesday.

A Dollar General-Family Dollar combo compared with that proposed by Dollar Tree would result in a larger entity with more negotiating power to obtain lower prices from suppliers, Mushkin said.

The smaller proposed Dollar Tree-Family Dollar combination could merely "embolden Wal-Mart to further accelerate its small-box plans and result in market share gains for Wal-Mart," Mushkin said.

Dollar Tree traded recently at $54.50, up 1.6 percent. Dollar General was at $64.55, up 0.88 percent. Family Dollar traded at $80.27, up 0.5 percent. Wal-Mart gained 0.5 percent to $75.88 a share.

Latest Ratings for DG

Feb 2015JP MorganReinstatesOverweight
Dec 2014CitigroupInitiates Coverage onBuy
Dec 2014BarclaysMaintainsEqual-weight

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Posted-In: Scott Mushkin Wolfe ResearchAnalyst Color News M&A Analyst Ratings


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