M&A Heats Up In Dollar Stores & Discounters (WMT, NDN, APO, KKR, BRK-A, DG, FDO, DLTR, BIG, TUES, TJX)

If there is one single obvious trend you need to burn into your brain regarding retail it is this: DOLLAR STORES!!!  After that it is discount stores.  Even though dollar stores are no longer solely “$1.00 and under” with items, this is a secular trends.  We showed previously that dollar store chains are now where Wal-Mart Stores Inc. (NYSE: WMT) was back in the early 1990s.  Private equity and other savvy investors are active in this space.  You do not have to like what this says about America, but it is what it is.

Dollar stores are yet again in the news on from the New York Post that 99 Cents Only Stores (NYSE: NDN) is soon to get a $22.00 to $24.00 buyout offer from the private equity outfit Apollo Global Management, LLC (NYSE: APO) to top a prior buyout offer from Leonard Green & Partners at about $19.09 earlier in the year.  This may be the rumor mill at work, but there are reasons that this is the case.  The trick here is that the founding family controls about one-third of 99 Cents Only and our understanding is that a new deal might be complicated but would still probably boil down to the highest price within reason.

Dollar General Corporation (NYSE: DG) is a Stock to Own for the Next Decade!  It just saw a secondary offering where Kohlberg Kravis Roberts & Co. (NYSE: KKR) and private equity affiliates sold stock.  This has risen significantly since its re-IPO and each pullback has only proven to be a bargain-bin buying opportunity.  To prove a point, the stock hit a 52-week and all-time high of $38.33 on Friday and Warren Buffett’s new portfolio manager bought shares for Berkshire Hathaway Inc. (NYSE: BRK-A).

There has also been buyout interest in Family Dollar Stores Inc. (NYSE: FDO) and Dollar Tree, Inc. (NASDAQ: DLTR).  Family Dollar shares are up 4.5% at $54.38 and Dollar Tree is up only 0.3% at $75.46.

Big Lots Inc. (NYSE: BIG) is no dollar store, but it is very close and it has much of the same customer base.  It has also been under some perceived buyout interest as well.  Its shares are up almost 3% at $34.22 today against a 52-week range of $27.82 to $44.44.

Another close-out store is Tuesday Morning Corp. (NASDAQ: TUES) and it is often overlooked because it has a mere $172 million market capitalization rate.  At $4.03, its 52-week range is $3.38 to $5.93.

99 Cents only is trading up almost 10% at $20.50 today and it hit a new year high of $20.90 earlier.  Before 2005, this one was worth $30 and $35 at the peak and it pays no dividend.

Again, you do not have to like what the growth of discounters and the growth of dollar stores says about America.  Frankly, it is not very pleasant and it fits in with the theme of lower median income and higher poverty.  If Warren Buffett and private equity giants have so much interest in this sector, ask yourself if there is money to be made.

The TJX Companies, Inc. (NYSE TJX) may be too large now for private equity buyers to focus on with its $21.5 billion market valuation.  At $56.65, its stock is pennies away from the year high of $56.78 and that Barron’s $60+ target is looking much closer now.

Family Dollar is the only real dividend in the dollar sector with a 1.4% dividend yield.  TJX Companies is roughly the same dividend yield.  Wal-Mart offers the highest yield of most retailers, but again: Dollar Stores Are The Next Wal-Mart!

Here is the funny thing… Dollar stores are no longer cheap against the stock market.  They are expensive for the simplest of explanations: this is a secular trend and the growth rate looks to be continuous for this segment.

JON C. OGG