It's no secret that dollar store businesses have been defying the economic downturn, benefiting from a shift in consumer attitude that embraces frugal spending. With their aisles overflowing with customers who want to stretch their shopping dollar, deep-discount retailers have been replenishing their coffers during the recession, while some of the big retailers were going under or closing stores.
The conventional view that dollar stores will perform poorly in an improving economy is no longer valid as they continue to grow even in recovery, given their strategy of expanding product mix.
Dollar Tree Inc. (DLTR), the nation's third-largest deep-discount retailer behind Dollar General Corp. (DG) and Family Dollar Stores Inc. (FDO), reported yet another stellar quarterly results last week.
Let's take a look at the company's historical performance and the driving forces behind its growth.
Company Overview
The Chesapeake, Virginia-based Dollar Tree operates most of its stores under the Dollar Tree name, which offer merchandise at the fixed price of $1.00. The company also runs stores under the name Dollar Bill$, Dollar Express, Greenbacks, Only $1.00 and Deal$.
The Deal$ stores acquired in 2006 for $32 million, sell most items for $1.00 or less but also sell items for more than $1. According to the company, the Deal$ stores provide an opportunity to leverage the company's infrastructure in the testing of new merchandise concepts, including higher price points, without disrupting the single-price point model.
The company's merchandise mix includes consumables like candy, food, basic health and beauty care products, paper, plastics, household chemicals, frozen and refrigerated food in select stores, variety products like toys, durable housewares, gifts and seasonal goods, which include Easter, Halloween and Christmas merchandise, along with summer toys and lawn and garden merchandise.
The company is also experimenting an expanded grocery store concept called Dollar Tree Market, which will have a wide array of products ranging from meat and fruit to housewares and baked goods made on the premises.
Historical Performance
The company's fiscal year ends on the Saturday closest to January 31. In the last five fiscal years from 2005 through 2009, Dollar Tree's net sales increased at a compound annual growth rate, or CAGR, of 9%, while its earnings per share clocked in a CAGR of 17.35% during the same period.
For the year ended January 31, 2010, Dollar Tree's net earnings rose to $320.5 million or $3.56 per share from $229.5 million or $2.53 per share a year before. The company's annual revenue was $5.23 billion, up from $4.64 billion in fiscal 2008.
The company believes that the majority of its future sales growth will come primarily from new store openings and from its store expansion and relocation program. Dollar Tree, which operated 2,735 stores in 48 states at January 29, 2005, now operates 3,874 stores. For full year of 2010, the company has plans to open 220 new Dollar Tree stores, 25 new Deal$ stores and 75 relocations for a total of 320 projects. During the first quarter of 2010, Dollar Tree opened 74 stores, closed 6 stores, and expanded or relocated 34 stores.
Q1 2010 Performance
In the first-quarter ended May 1, 2010, Dollar Tree's net income increased 5% from the year-ago quarter, driven by an increased demand for health and beauty care products, food, household consumables, and party goods. The company's per share earnings as well as revenue topped Wall Street's expectations.
The net income for the first quarter of fiscal 2010 was $63.6 million or $0.73 per share, compared to $60.4 million or $0.66 per share in the previous year quarter. The first-quarter 2010 results included a non-recurring, non-cash charge of $26.3 million or $0.19 per share related to the company's retail inventory change. Excluding this charge, earnings per share were $0.92 in the just-reported first quarter, which came in well above analysts' consensus estimate of $0.84 per share. Analysts' estimate typically excludes one-time items.
The quarterly sales were $1.35 billion, up 12.6% from $1.20 billion reported in the comparable quarter last year. Wall Street analysts were expecting the company to report sales of $1.31 billion.
The company has a knack for surprising Wall Street with better-than-expected earnings, and for the past four quarters, its earnings have topped analysts' estimates by an average of 11.5%.
Growth Drivers
Barring 2005, which was a down year, Dollar Tree has posted positive same-store sales growth from 2005 through 2009. Same-store sales, or sales in stores open at least one year, is a key metric of a retailer's financial health.
With consumers pinching pennies, the discount-retailer's same-store sales increased 7.2% in fiscal 2009, compared to 4.1% growth reported a year before. Same-store sales increased 6.5% in the first-quarter of 2010.
The company's same-store sales growth is driven by an increase in the number of transactions and an increase in average transaction size. According to Dollar Tree, its same-store sales continue to be positively affected by a number of its initiatives, including continued penetration of debit and credit card and the roll-out of frozen and refrigerated merchandise to more of its stores.
Dollar Tree has increased the consumable merchandise by adding freezers and coolers to additional stores. At May 1, 2010, the company had frozen and refrigerated merchandise in about 1,560 stores compared to 1,320 stores a year before.
For the fiscal year ended January 30, 2010, consumables made up 48.1% of the merchandise, up from 45.7% a year before. Variety categories accounted for 46.9% of merchandise, down from 48.8% a year before. Seasonal goods accounted for 5.0% in 2009, compared to 5.5% of the merchandise in the prior year.
All of Dollar Tree's stores accept cash, checks, debit cards, VISA credit cards, Discover credit cards and Electronic Benefit Transfer. The company also accepts "SNAP" food stamps in 75% of its stores and intends to continue expanding food stamp acceptance to more stores this year. Expanding customer payment options has increased both the traffic and the average size of transactions at its stores, according to Dollar Tree.
Dollar Tree makes selective acquisitions, targeting companies that have a similar single-price point concept. Since 1995, the company has added a total of 609 stores through mergers and several small acquisitions.
What's in store for Q2 and FY10?
Dollar Tree foresees per share earnings to range between $0.77 and $0.85 for the second quarter. Looking further ahead to full year 2010, the company expects earnings per share to be $4.10 to $4.31, including the impact of the non-cash, non-recurring charge incurred in the first quarter. Excluding the charge, earnings per share for the full year 2010 are expected to be $4.29 to $4.50.
Analysts are bullish about the company's earnings prospects and over the last seven days they have revised upwards their second quarter estimates by 7 cents to $0.82 per share and fiscal 2010 estimates by 21 cents to $4.46 per share.
The company anticipates sales for the second quarter to be in the range of $1.32 billion to $1.36 billion, based on low to mid single digit positive comparable store sales. Wall Street analysts have a consensus revenue estimate of $1.35 billion.
For the full year 2010, Dollar Tree has forecast sales to range between $5.67 billion and $5.80 billion. Analysts are looking for revenue of $5.78 billion.
Business Strategy
Dollar Tree buys approximately 55% to 60% of its merchandise domestically and imports the remaining 40% to 45%, primarily from China where goods are less expensive. The company's domestic purchases include closeouts. Big retailers that are unable to sail through the economic turbulence dispose their inventory often at a concession to regain costs. The liquidated inventory is purchased by deep-discount retailers like Dollar Tree and is sold at an even deeper discount to their customers. Thus Dollar Tree is able to offer merchandise at a minimal cost as low as $1.
The company prides itself in maintaining a disciplined, cost-sensitive approach to store site selection in order to minimize the initial capital investment required and maximize its potential to generate high operating margins and strong cash flows. Dollar Tree focuses on opening new stores in strip shopping centers and prefers to lease its stores rather than owning them.
The operating margin in 2009 increased to 9.8% from 7.9% a year before and it remains among the highest in the value retail sector. In the first quarter of 2010, operating margin decreased to 7.6% from 8.1% in the comparable year-ago quarter. This decrease was due to a $26.3 million adjustment to reduce beginning inventory on the first day of fiscal 2010. Excluding this adjustment, the operating margin for the first quarter of 2010 was 9.5%, an increase of 140 basis points from the year-ago quarter.
The company buys products on an order-by-order basis and has been able to reduce inventory per selling square foot, improve merchandise flow, increase inventory turnover and control distribution and store operating costs.
The lower the inventory per selling square foot, the better because it means a retailer is tying up fewer dollars in inventory for the amount of gross or net selling square feet per store.
Inventory per square foot, a metric that measures how much inventory in dollars is owed to the gross or net selling square footage within a store, decreased 5.6% at January 31, 2010 compared to a year before.
From 2005 through through the first quarter of 2010, total selling square footage, a measure of store productivity has increased from 23 million square feet to 33.0 million square feet.
E-commerce
Dollar Tree has an e-commerce site called "Dollar Tree Direct" for customers who want to make bulk purchases from its stores. Last April, the company launched a redesigned Web site - Dollartree.com, featuring a new e-commerce platform.
Balance Sheet
Dollar Tree is in decent financial shape with more cash than debt on its balance sheet. As of May 1, 2010, the company had $338.6 million in total cash and $267.5 million in long-term debt. The company has a current ratio of 2.4, which means it has 2.4 times the current assets needed to satisfy obligations due in the near future.
IPO, Stock Splits and Share buyback
Dollar Tree went public in March 1995 pricing its shares at $15 each. Since the IPO, the stock has undergone a 3-for-2 stock split four times - in April 1996, July 1997, June 1998 and June 2000. Adjusted for all the above mentioned stock splits, the opening price of the IPO was $3.36.
On May 26, 2010, the stock touched an intraday high of $63.82 -the highest price since the company went public in 1995. With the company's board of directors approving yet another stock split, DLTR will be undergoing a 3-for-2 stock split again, which will be effected on June 24.
The stock split is in the form of a 50% common stock dividend and the new shares will be distributed on June 24, 2010, for shareholders of record as of the close of business on June 10, 2010. With the stock split, the number of outstanding shares of the company's common stock will increase from about 85 million shares, pre-split, to approximately 127 million shares, post-split.
On March 19, 2010, Dollar Tree entered into an agreement to repurchase $200.0 million of its common shares under an Accelerated Share Repurchase Agreement. The accelerated share buyback is a part of a $500 million share repurchase agreement announced last October. An initial $500 million share repurchase program was announced in November 2006.
Risks
Being a fixed-price retailer, Dollar Tree cannot raise the sale price of its merchandise to offset cost increases. Therefore any increase in costs such as the cost of merchandise, wage levels, shipping rates, freight costs, fuel costs and store occupancy costs may reduce the company's profitability.
Since the company imports a significant portion of its merchandise directly from overseas, any disruption in the flow of imported goods or an increase in the cost of those goods may significantly decrease its profits.
Concluding Thoughts
Dollar Tree has emerged as one of the big winners during recession and continues to benefit even in a recovering economy as shoppers continue to patronize dollar stores, proving that its model is all time relevant.
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May 01, 2026 15:54 ET Central banks dominated the economics news flow this week with almost all major ones announcing their latest policy decisions and many boosted expectations for a rate hike in June. In other news, several countries released the preliminary data for first quarter economic growth. In the U.S., comments by Fed Chair Jerome Powell were also in focus as his term ends this month.