Although the decision by
to catapult itself to the forefront of the industry by gobbling
applied some pressure to its second-quarter financial results,
even without the acquisition -- which isn't a sure thing yet --
it's still a leading player in the discount variety store space
that continues to find new ways to grow.
Money does grow on trees, Dollar Trees that is.
For investors looking for confirmation that the Dollar Tree
growth story remains intact even if
manages to change Family Dollar's mind and get it to ditch Dollar
Tree and hitch up with it -- Family Dollar this week rejected the
General's initial $8.9 billion offer in favor of Dollar Tree's
lower $8.5 billion bid -- Dollar Tree management offered up at
least five takeaways during its recent earnings conference call
to be particularly aware of going forward.
Look for more stores
Even without the Family Dollar acquisition, you can expect to see
more Dollar Tree stores coming to your area, as it plans to
develop new formats in new markets and new channels as growth
vehicles for the future.
It currently operates 5,166 stores across 48 states and five
Canadian provinces, less than half the size of the biggest deep
discounter, Dollar General, which runs 11,338 stores in 40
states, and putting it in third place behind Family Dollar, which
operates 8,200 stores in 46 states. But management thinks Dollar
Tree can eventually support 7,000 stores in the U.S., plus
another 1,000 in Canada. CEO Bob Sasser says, "Our goal is to be
recognized by customers as the leading retailer in Canada at the
single price point of $1.25 just as we are in the U.S. at $1
It opened 90 new stores in the second quarter, relocating and
expanding 20 existing stores, for a total of 110 projects. It
closed four stores in the quarter. For the full year, it plans on
opening 375 new stores while relocating and expanding 75
additional ones for a total of 450 projects across the U.S. and
That kind of growth is possible because Dollar Tree is more
profitable than the competition. Even as it's given up some
points to continue driving traffic, the discount variety chain
still stands well above of the competition.
Dollar for dollar, Dollar Tree runs a profitable operation.
A productive use of time
At the same time that it's expanding its footprint it's also
making the square footage more productive by expanding the
categories offered. Already customers are finding pet
supplies, hardware, health, beauty, and eyewear a valuable
commodity at the dollar store chain, all of which helped drive
its sales higher in the quarter. They also happened to be among
the departments seeing the largest comparable sales too.
Stretching a dollar has been a lot easier at Dollar Tree as it
bulks up on value.
One way it's helping the customer to find more is by
increasing the size of the product sold even though the price
point remains the same. For example, Dollar Tree stocks king-size
candy bars instead of regular-sized ones, or offers an 18-ounce
size instead of 12 ounces, but still selling for a dollar. And
it's bringing in more brand names like Dawn and
Palmolive in home goods or Stax potato chips in food and
Finding bigger sizes or brand name goods cheaply priced
ensures customers are going to want to return to buy more. As
Sasser says, "throughout the store, we've expanded in more space
and more inventory and more of the things that our customers are
looking for in a tough time."
Writing your own ticket
Those tough times are nothing to ignore, but even though other
retailers bemoan weak or lost traffic, Dollar Tree has continued
to increase the foot traffic it sees in its stores. No doubt it's
because of the greater assortment of goods customers are finding
on its shelves, which also happens to have the happy effect of
increasing the average ticket (what people spend) in the
Tisket a tasket, Dollar Tree is witnessing a growing
Says Sasser, "So as more people are shopping more frequently,
our traffic is up; as they're staying longer and they're buying
more, our average ticket is up."
Helping to increase Dollar Tree's average ticket is its
Deal$ stores, which sell goods above a dollar. Where the average
ticket at its namesake stores was around $7.80 in the second
quarter, at Deal$ it was $9.51. Moreover, the average ticket
with items that were greater than a dollar was $14.23, with
over half of all transactions having items more than a dollar as
well. Expect to see the Deal$ concept built out even more.
But the growth comes at a cost
Despite industry-leading margins and greater traffic, Dollar Tree
has had to actually give up some profits to keep customers coming
in the door. Since it's head-and-shoulders above the competition
it's not much of a concern at the moment, but is something
investors need to keep tabs on.
By going with brand-name goods, for instance, Dollar Tree
gives up a little bit in profit. But if it means it will keep
volume growing then it's a good trade-off for the company. As
Sasser explained, "we're always balancing the name brand offering
with the private label name brand equivalent offering ... when
given the choice between the brands, all things equal,
[customers] like the brands."
It's also making sure it's stocked up on the first of the
month because Dollar Tree found that when the payroll checks hit
the bank accounts consumers like to hit the stores. Being able to
find a product on the shelf when they want to buy it helps keep
the sales growing.
One cost beyond its control, though, has been freight
transport, due to a shortage of truck drivers, a problem that's
building up for some time
, but hit the deep discounter all of a sudden during the quarter
causing freight expenses to increase by nearly 40 basis
Have a cold one on me
One of the not-so-secret successes of Dollar Tree's growth has
been the expansion of refrigerators and freezers that serve to
drive more customers to buy more frequently. After adding them to
141 more stores in the quarter, it now has frozen and
refrigerated products in 3,410 stores, or two-thirds of the
total, with plans to keep building them out.
Sure, they tend to be lower-margin products, which is going to
eat into the margin numbers just as brand-name goods will, but
because they're stocked with consumables the customer comes back
Sasser points out the "merchandize mix in our Deal$ stores is
little different than what you find at Dollar Tree,"
with consumables comprising 62% of the items sold at Deal$
while Dollar Tree is split pretty evenly 50-50.
Sales are up, margins are still leading the industry even if
Dollar Tree's given up a point or two, comparable sales remain
strong, and customers keep coming back, driving up the amount of
the basket their buying. Even if it's not successful in acquiring
Family Dollar, though at this point the deal seems on track,
investors can expect to see Dollar Tree continuing on the growth
trajectory they've come to expect.
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5 Things Dollar Tree Inc.'s Management Wants You
originally appeared on Fool.com.
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