Dollar Tree Stores (NASDAQ: DLTR) is a discount retailer and the largest retailer offering a fixed price of $1 on all merchandise in its main discount variety stores. The company targets low to lower-middle income consumers and sells everyday products from food and personal care products to non-essentials like toys and holiday decorations.
Unlike other stores in the retail industry, discount retailers like Dollar Tree typically do not suffer during economic slowdowns because lower-class and price-conscious middle-class consumers gravitate towards discount stores in order to save money. The company competes for price-conscious shoppers in an intensely competitive and saturated market, which is dominated by big-box retailers like Wal-Mart Stores (WMT) and Target (TGT) as well as comparable companies like Family Dollar Stores (FDO) and 99 Cents Only Stores (NDN).
The company is able to sell its goods for just $1.00 each by importing 40 to 45% of its products from foreign countries (most of which come from China) and buying 55% to 60% domestically including purchases through closeouts. The company has established close relationships with manufacturers which have allowed them do purchase products at much lower costs.
Each Dollar Tree store carries an average 6,000 items at any given time. The company sells its products in three different business segments:
Dollar Tree, as have most other discount retailers, has had higher revenues, net incomes, and same store sales during the recession as consumers look for deals in order to save money. The question though is will discount retailers like Dollar Tree be able to sustain the same levels of growth after the recession has passed. Although Dollar Trees offers its products at a fixed price of $1, it does not necessarily mean that customers are getting the best deal. Not only do other discount companies offer extremely low prices but some may offer higher quality products. When the recession passes there is risk that customers will abandon these discount stores and spend a little more money to buy higher quality goods. If Dollar Tree can retain "trade-down" consumers, the company will have a better chance at sustaining high levels of growth.
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. Macroeconomic and company specific changes to cost structure, including higher freight costs, rising energy prices, and supplier or distributor consolidation increases the risk of large margin decreases that cannot be offset by price increases.
Dollar Tree is a discount retailer that competes with other stores that have similar business models. Thus, the company faces direct competition from dollar-store chains, such as Family Dollar Stores (FDO) and 99 Cents Only Stores (NDN), that sell many of their products at or around $1.
As a discount retailer, Dollar Tree 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.