WalmartYou might have heard that Wal-Mart (WMT) may never be great again. One reason for the discount giant's big-time problems could be the number of consumers who are trading down -- way down, in fact, to the rock bottom of the retail world.

It's hard to resist merchandise priced at just a buck. That's why the dollar-store concept is doing such a brisk business – and not just among already-thrifty bargain hunters. As the U.S. economy continues to struggle, the dollar-store model gains even more relevance to an increasing number of budget-conscious or newly constrained consumers.

For investors, not all dollars stores are created equal. Here's how to shop for these stocks, and stretch your investing dollars in this retail subsector.

Are There Any More Bargains in Dollar-Store Stocks?

There was a time when trolling dollar-store stocks presented easier pickings. During the past year, however, more investors have caught on to the trend. That gain in popularity shows up in the group's price-to-earnings ratios and share prices. Take a look:

  • Dollar General (DG) recently reported triumphant quarterly results, including an 11% increase in sales and a 5.9% surge in same-store sales. However, its quarterly profit only increased 3.4%. Dollar General shares are currently trading at 19 times earnings.
  • Dollar Tree's (DLTR) recent quarterly tidings revealed slowing sales growth. Net income increased 21.7% in the second quarter. Sales increased a robust 12%, while same-store sales jumped 4.7%. Still, the company forecast same-store sales growth to slow to a low single-digit percentage increase in the current quarter. Dollar Tree trades at 20 times earnings.
  • Family Dollar (FDO) doesn't report its latest quarter until Sept. 26. In June, the company reported a 6.5% increase in net income. Sales climbed 7.8%, and same-store sales rose 4.7%. Family Dollar shares trade at 17 times earnings.

After seeing such results, you might be tempted to reconsider investing in discount giant Wal-Mart. After all, the Bentonville behemoth's shares trade at a far cheaper 11 times earnings. But Wal-Mart is still struggling to turn its sluggish U.S. sales around. What's giving it fits? People flocking to dollar stores.

Where to Bet Your Bottom Dollar

Given dollar stores' trendy popularity and higher multiples, investors need to choose carefully.

I believe Dollar Tree is the most appealing of the three dollar-store stocks above, even though it recently unveiled a disappointing forecast. Dollar Tree doesn't have much debt to speak of: Its total debt-to-capital ratio is just 14.3%. Dollar General's debt-to-capital ratio is a more uncomfortable 38.9%.

Although Family Dollar may look like the cheapest stock of the three, it hasn't reported the strongest results over the past few years, having clocked annual sales increases in single-digit percentages. Dollar Tree has reported annual sales increases of about 12% for two years running.

The bottom line is that Dollar Tree is a strong player with a good balance sheet. If it's trading at a slightly higher multiple, there's probably a reason to pay a little more for a history of growth and a more conservative stock. It looks likely that Dollar Tree will deliver more bang for investors' bucks for the long haul. And what's just as important as nabbing a bargain? Getting back more than you paid in value.

Motley Fool analyst Alyce Lomax owns no shares of any of the companies mentioned. The Motley Fool owns shares of Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart.


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