The shining stars of the economic recession, the dollar stores: Dollar Tree Inc. (DLTR), Family Dollars (FDO) and Dollar General (DG) rallied throughout 2008-2010 along with their sales. With improving economic conditions and consumer confidence the question arises whether these stocks are worth your dollar?
Since mid 2012, share prices of these three dollar stores have been moving downwards given slowing sales and shrinking margins. However, last week Dollar Tree reported spectacular 4Q12 results and since then the stock has been up 12%, trading at $46.23. 4Q12 sales were up 26.3% with comparable Same Store Sales (SSS) of 2.4% driven by an increase in traffic. Its 4Q12 operating margin increased 70 basis points to 16.2% driven by a 15 bps increase in gross margin and a 55 bps reduction in Selling, General and Administrative expenses. Despite facing tough SSS in 3Q12, Dollar Tree was able to post strong 4Q results due to a change in merchandise mix and the holiday season.
Why would I still invest in Dollar Tree?
Despite the lackluster growth sales in the past few years, Dollar Tree has been able to consistently maintain and increase its margins.
Increase in customer base:
- The customer base for dollar stores has changed. Given moderate recovery of economic conditions and increasing gas prices, customers are increasingly shopping at dollar stores.
- As rightly explained by Dollar Tree CEO Bob Sasser, consumers are still pressured by rising gas prices and delayed tax refunds. As a result, cash-strapped consumers are looking at these stores as a one-stop solution and destination. By including the right kind of merchandise, Dollar Tree is providing all products, must-haves as well as discretionary, under one-roof and at $1.
- Dollar Tree exceeded its expansion plans for FY12 and opened 315 new stores and a total of 390 projects. Apart from store openings, the company is also focused on increasing the productivity of these stores. In 2012, average new store sales per square foot increased to the highest level since 2001 and have increased each year for 7 consecutive years (from $1.3 in 2007 to $1.6 in FY11, FY12 numbers not available).
- Further, the company plans to increase its frozen and refrigerated products and has mentioned that this has been very productive as it helps to drive traffic and provide incremental sales across all categories, including higher-margin discretionary products. Frozen and refrigerated products cadence shall continue in FY13 and shall roll out to another 475 stores.
- Dollar Tree is also focused on expansion of its geographic reach and the development of additional channels of distribution, specifically that means Deal$, Dollar Tree Canada and Dollar Tree Direct. It is aggressively expanding its Canadian store base. In 2012, it planned to grow its store count by 25% but exceeded its plan and opened 41 new stores in Canada. As previously reported, Dollar Tree is of the opinion that the Canadian market can support up to 1,000 Dollar Tree stores, in addition to the 7,000 store potential for Dollar Tree in the United States.
- For FY13 it guided for $320 million to $330 million capital expenditures which will focus on new stores or remodels, the addition of frozen and refrigerated capability and ~$37 million towards the new distribution center in Windsor, Connecticut and $25 million for the expansion of its DC in Marietta, Oklahoma.
- While Dollar Tree reported positive results, Family Dollar reported weak results and guided lower future earnings as well. Its EPS of $0.69 was at the lower end of its guidance $0.69 to $0.78 and was a result of lower margin products sales that contracted its gross margin around 120 basis points.
- While Dollar General posted strong 3Q12 sales growth of 10.3%, Gross Margins suffered due to higher markdowns, a lesser impact from price increases compared to the prior year, a heavier consumables weighting within the sales mix and a higher shrink rate. But it hasn't stopped the company's expansion plans. Already the largest of the dollar-store chains, Dollar General recently revealed plans to open 635 new stores in FY13. However, concerns remain that the company's rapid expansion plans may hurt near-term margins.
- Dollar Tree has given solid guidance for 2013, anticipating low-single-digit same-store sales growth, driving total sales to $7.79-$7.97 billion and earnings per share of $2.54-$2.74.
- Further, in comparison with its peers, Dollar Tree has better margins as well as impressive return metrics. Dollar Tree's balance sheet also is much stronger given its high cash on hand (1st priority for utilization is share repurchase) and lower debt levels. Dollar Tree also has the greatest potential with respect to location growth (Dollar General: 10,000 stores, Family Dollar: 7,500 and Dollar Tree: 4,500)
- Given the above factors, Dollar Tree is definitely worth your dollar.