TOP CONTRIBUTORS

Michael Francis

Helen Han

Investolator

DLTR AT A GLANCE

P/E ► 27.2 AVG EV/EBITDA ► 12.9 AVG ROA ► 7.6% AVG ROE ► 12.2% AVG Debt to Equity ► 0.618 AVG Current Ratio ► 2.68 AVG Interest Coverage Ratio ► 45.7 HIGH

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

Dollar Tree Stores is a discount retailer with more than 3,200 stores in 48 states. The company is the largest retailer offering a fixed price of $1 on all merchandise in its stores (not including the slightly more than 100 Deal$ stores), and targets a low to lower-middle income consumer. This customer base makes the companies' sales more exposed to macroeconomic risk as low-income households are generally more sensitive to the rising oil prices and falling real estate values (see also Subprime Lending Crisis).^[1] The company competes for price-conscious shoppers in an intensely competitive and saturated market, which are dominated by big-box retailers like Wal-Mart Stores (WMT) and Target (TGT) as well as comparable companies Family Dollar Stores (FDO), Dollar General (DG), Big Lots (BIG) and 99 Cents Only Stores (NDN).

The industry is marked by few barriers to entry and low customer switching costs (i.e., customers are not very loyal to a store). The company is, however, attempting to differentiate itself from big-box retail by growing store count in highly populated urban markets, which have been traditionally shunned by larger competitors due to the higher overhead expenses and lower margins. It is also adding greater foodstuffs to its offering (these are traditionally lower-margin product lines).^[2] Other dollar discount stores such as Family Dollar Stores (FDO), however, are attempting the same strategies. Vis-a-vis competitors, Dollar Tree has leveraged its store network most efficiently, with the highest operating margins and sales per square foot. It remains to be seen if the company can maintain this efficiency while growing its store base in lower-margin environments.

[edit] Company Overview

[edit] History

In 1953, K. R. Perry opened a Ben Franklin variety store in downtown Norfolk, Virginia, which later became K&K 5&10. Through the 1970s and 1980s, K&K 5&10 evolved and grew to a multi-state chain of toy stores, with the assistance of Dollar Tree's founders Doug Perry, Macon Brock and Ray Compton.^[3]

[edit] Financials and Store Metrics

Below are relevant operating and store metrics for Dollar Tree. The company's operating profit margin has been historically double that of competitors, and its sales per store have also outpaced those of comparable dollar discount stores.

^[4]

^[5]

[edit] Business Growth

[edit] Q4 FY2008 (ended January 31, 2009)

• DLTR's net income rose 11.1% as compared with the previous-year fiscal quarter, from $94.7 million in Q4 2007 to $105.2 million in Q4 2008. DLTR benefited from its market position as a discount dollar-store retailer as recessionary pressures set in and consumer budgets shrank, allowing DLTR to appeal to more price-conscious consumers, increasing store traffic and sales. ^[6]

• Net sales were $1.39 billion in Q4 2008, up 6.8% from net sales of $1.30 billion for the same quarter last year. In a challenging recessionary environment, DLTR benefited from its role as a discounted dollar retailer of consumables and household goods and continued to target its customer base of price-conscious lower-to-middle-class consumers. ^[6]

• Comparable store sales for the quarter increased 2.2%; for the whole FY2008, comparable store sales were up 4.1%. ^[6]

• Operating profit for Q4 2008 was $165.2 million, and operating margin was 11.9% of net sales. This operating margin was held constant from Q4 2007, during which operating profit was $154.4 million, also 11.9% of net sales. During the past year, DLTR did not significantly change the composition of its inventory or incur unforeseen SG&A costs, resulting in constant operating margins as sales revneue rose proportionately. ^[7]

Breakdown of Dollar Tree's total operating stores, store openings, closings, and relocations/expansions in Q3 2008 and the same fiscal quarter of two previous years. ^{[8] [9] [10]}

[edit] Trends and Business Drivers

• Low-income customers are more sensitive to macroeconomic changes. A discount retailer, DLTR’s customer base is largely of the low-income demographic. Low-income families are generally more sensitive to rising energy prices and rising interest rates, which can negatively affect the company’s sales as customers attempt to save and cut back on non-essential spending. While many of Dollar Tree’s products are considered "essentials," low-income households often shift their spending to products that are lower priced/lower margin for the company during periods of high energy prices, high interest rates, and housing price crises.^[11] However, these low margin goods help the company maintain foot traffic in its stores even during recessions.^[12]

• Discounters experience difficulty passing on cost increases to customers. Because the company’s low-income customer base is highly sensitive to price and because the company competes largely with a fixed merchandise price of $1, input cost increases (such as inventory, overhead, and marketing) are difficult or impossible to pass on to consumers. Although the company has been able to raise some prices - changing an item that was 2 for $1 to 59 cents apiece, for example - the prices of the vast majority of its goods cannot be increased.^[12] Macroeconomic and company specific changes to cost structure, including higher freight costs, rising energy prices, and supplier or distributor consolidation may lead to large margin decreases that cannot be offset by price increases.

• Inflation Risk. The company assumes substantial inflation-related risk. Because the majority of its stores are based on the $1 fixed price point concept, the company is limited in its ability to pass on inflation to consumers on a regular basis. And, indeed, lest the company experience awful returns in the very long-run, the company must someday become the Two Dollar Tree Stores. The company is, however, growing via its Deal$ concept, which offers a range of prices on merchandise, including items over or under $1. This may help mitigate inflation risk in the long run, but will depend upon rapid growth of this concept, as it currently comprises just under 4% of the company's store base.^[13]

• The company operates in a mature and saturated market, with stiff competition and low competitive advantages. DLTR competes against discounters with wider selection and significant cost and scale advantages in its local markets. A Dollar Tree store operating within a few miles of a nearby Wal-Mart or Target, for instance, will struggle to compete on value and selection, and may instead gain customers via convenience and location. Also, while the company is technically the largest "single price point" ($1) retailer and attempts to differentiate and scale itself in this way, it faces competition faces other “dollar stores,” that have similar or identical value propositions, such as Big Lots (BIG), Family Dollar Stores (FDO), Dollar General (DG), and 99 CENTS ONLY STORES (NDN). With low barriers to entry and few natural competitive advantages to gain, the industry has become flooded with dollar stores and collectively, these companies are approaching U.S. saturation. While Dollar Tree has some scale and is attempting to both grow and differentiate itself by expanding in densely populated, higher traffic urban areas, there is substantial risk of lower margins due to increased overhead expenses as well as stiff competition as other discounters pursue the same strategies.

• New focus on increased food offerings can be a risky undertaking. DLTR has been increasing the square footage in its stores dedicated to inexpensive food items for customers^[14] The company believes this will drive greater traffic to its stores. Indeed, stores generally experience 7% increases in sales the year in which new coolers are installed, as stop-in grocery traffic picks up. However, food retailing/groceries are typically very low margin, competitive businesses, so the company assumes something of an opportunity cost and substantial risk in use of its floor plan.

[edit] Competition and Market Share

Discount variety retailers nationwide account for some $420 billion annually in sales, and operate approximately 40,000 stores across the country.^[15] The industry is characterized by intense price competition, low barriers to entry, and virtually non-existent customer switching costs.

As a discount retailer, DLTR faces significant competition from big-box sellers like Wal-Mart Stores (WMT) and Target (TGT), whose enormous scale allows them to extract value in their inventory purchases and pass these savings on to consumers. Dollar Tree Stores, however, attempts to differentiate itself with its smaller-format stores that enable the company to open shop in most rural, small town, and urban markets while incurring fewer overhead costs. Along these lines, the company is more focused on urban areas than Wal-Mart, which has traditionally focused on dominating rural and small-town markets. In some sense, it is more nimble and less concentrated than big-box competitors, but does not necessarily enjoy the same economies of scale. The company's growth going forward is highly dependent on finding attractive new urban stores to add to its existing base, while avoiding opening up in areas already dominated by major competitors, a challenging task given the market saturation of the US discount retailing industry.

Below are sales, store, and market share metrics for comparable companies.^[16]

[edit] References

1. ↑ DLTR 2006 Annual Report, "Risk Factors," pg 11
2. ↑ DLTR 2006 Annual Report, pg 19
3. ↑ "History of Dollar Tree Stores," Company Website, http://www.dollartree.com/about_us/History.cfm, 2007.
4. ↑ Compiled from DLTR 2006 Annual Report, pg 16
5. ↑ Compiled from DLTR 2006 Annual Report, pg 15
6. ↑ ^{6.0 6.1 6.2} DLTR Q4 2008 Earnings Report Press Release
7. ↑ ^{7.0 7.1} DLTR Q4 FY2008 Income Statement, Google Finance
8. ↑ DLTR Third Quarter Sales Increase 11.6%
9. ↑ DLTR Reports Q3 Comparable-Store Sales Increase of 1.9%
10. ↑ DLTR Reports Third-Quarter Sales of $910.4 Million
11. ↑ DLTR 2007 Annual Report, "Risk Factors," pg 11
12. ↑ ^{12.0 12.1}
13. ↑ DLTR 2006 Annual Report, pg 19
14. ↑ DLTR 2007 Annual Report, "Business," pg 19
15. ↑ First Research, Inc. (D&B) Discount Retail and Department Store Industry Report, Oct. 2007. These estimated figures exclude approximate sale of groceries and revenue of department stores, which compete very loosely with BIG
16. ↑ All figures compiled from most recent company annual reports
17. ↑ Market Share calculated as Company Sales/Total Industry Segment Sales nationwide as provided by 2007 First Research Report