Is Dollar Tree's New Marriage To Family Dollar A Sinful Move?

| About: Family Dollar (FDO)


Consumables are helping the dollar stores.

Can wine and beer help Family Dollar?

Dollar Tree may be picking up Family Dollar at the perfect time.

"Building on our food success and the decision to introduce tobacco, in fiscal 2015 we plan to begin a multi-year roll out of beer and wine," stated Howard Levine, CEO of Family Dollar Stores (NYSE:FDO) during the most recent earnings conference call. Junk food, cigarettes, beer, and wine - perhaps those are exactly what the doctor ordered for Family Dollar's recovery.

Family Dollar, Dollar Tree (NASDAQ:DLTR), and Dollar General (NYSE:DG) have been growing sales among their consumable offerings, especially with food, drink, and tobacco products. The increase in budget-conscious consumers has resulted higher sales of these items at discount variety stores.

The result is two-fold. First, there is the sale itself of these items which helps directly obviously. Then there is the indirect effect where people coming in for say a bag of chips or cookies, a pack of cigarettes, or a six-pack of beer then pick up some other items as well as long as they are in there.

For example, during Dollar General's most recent conference call, CEO Richard Dreiling pointed out only 31% of its cigarette customers buy cigarettes only. Another 27% pick up one or two other products as well, maybe a drink and a bag of chips or something else. Then another 42% purchase three or more items in addition to the cigarettes.

Dollar Tree doesn't sell alcohol or tobacco mainly because its strict one-dollar maximum price point doesn't make it practical. However, there is no shortage of junk food lining the shelves and filling the expanding coolers and freezers and its pending acquisition of Family Dollar will launch it directly into the tobacco and booze space.

According to its most recent conference call, Dollar Tree continues to expand its frozen, refrigerated, snack, and drink offerings. Dollar Tree has 3,269 stores with frozen and refrigerated products and is on track to add another 320 stores this year.

In line with what Dollar General is seeing, CEO Bob Sasser of Dollar Tree stated, "This category continues to serve the needs of our customers and it's a reason to come into the store more often. This increase in shopping frequency provides the opportunity to increase sales across all categories including our higher margin discretionary products."

It sounds a bit contradictory to be a "family" store that is now selling not just junk food but tobacco too. Family Dollar sees opportunity with expanded consumables and is going with it. In its conference call, Levine stated, "Our refrigerated and frozen cooler program remains a high priority initiative to drive trips and build the basket ... sales have been robust."

Family Dollar isn't done there. The company is now rolling out beer and wine. Family Dollar is starting out a "limited number" of stores for fiscal 2014 then accelerating it in 2015. Beer and wine will spread to most locations where it is practical depending on safety, state and local laws, etc.

What is most promising is some of the details Levine shared. First, he pointed out that private brand label consumable sales were up 9% in the quarter which outpaced the overall company sales increase of 3.3%.

Second, he stated, "Our test has shown that our average beer and wine basket is two to three times larger than our average basket." This sounds just like the traffic-building comments from Dollar Tree and Dollar General that when consumers come in for one item specifically, in this case booze, they tend to buy other things more often. Family Dollar sees this with cigarettes and the effect may be even more pronounced with adult beverages.

Finally, Levine stated, "Although it's only in about 200 stores we had our high beer sales over this July 4th weekend that we've had since we started the tests so we continue to grow and continue to build on that momentum and are really excited about what it means to us."

With same-store sales growth negative 1.8% last quarter, it won't take much booze sales to get that back in the black. The comments about July 4th weekend are encouraging though strength was probably seen across most chains during that three-day weekend.

It's also not surprising that booze would get some sales - booze has been selling successfully for thousands of years. It will be interesting to see just how robust beer and wine sales make their way into improving the top and bottom line for Family Dollar (or what will be the new parent Dollar Tree).

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.