Which Has Better Value, Dollar Tree Or Dollar General?

MKM Partners expects an in-line comp, but potential for EPS upside when Dollar Tree, Inc. DLTR reports fourth-quarter results on March 1. But, the brokerage continues to prefer Dollar General Corp. DG, which reports on March 16.

Analyst Patrick McKeever, who has a Neutral rating on the Dollar Tree stock, still expects EPS of $1.29 for Dollar Tree versus the Street's $1.32 and guidance of $1.24–$1.33. The analyst projects comps of 2 percent.

McKeever sees potential for EPS upside on the stalling of the FLSA overtime rules that were supposed to go into effect Dec. 1, 2016. Dollar Tree guided for a $0.03–$0.04 impact.

“We look for continued margin expansion at Dollar Tree (modeling OM up 35 bps to 15.4 percent), driven in part by the cycling of markdowns taken in 4Q15 related to the Deals' re-bannering,” McKeever wrote in a note.

Dollar Tree And Family Dollar

That said, McKeever says Family Dollar will continue to underperform Dollar Tree through FY 2017 as its core customers are dealing with food stamp cuts, higher health care and rent, and smart phone bills.

Related Link: Bernstein On Broadline, Hardline Retail: Target, Dollar General Favored

For the first quarter, the analyst expects Dollar Tree comps at 2 percent, with slight downside risk from the delay in federal tax refund distribution and EPS at $1.11, in line with the Street. For the year, the analyst sees comps of 2 percent and EPS of $4.55 versus the Street's $4.52 estimate.

“Our Neutral rating on the stock reflects a few things, including valuation, expectations for slower growth at Dollar Tree, and concerns about hiccups with the Family Dollar integration,” McKeever continued.

Preferring Dollar General

As such, the analyst prefers the Buy-rated Dollar General, which has a lower P/E (15.8x vs. 17.2x), isn't dealing with an acquisition, and could have more success in a more challenging industry backdrop.

Dollar General reports its quarterly results on March 16. Street expects EPS of $1.42 on revenue of $5.97 billion.

In addition, McKeever raised his price target on Dollar Tree shares by $1 to $84 and has $83 price target on Dollar General.

At last check, shares of Dollar Tree were down 0.62 percent to $78.92 and Dollar General fell 1.16 percent to $76.46.