The death of brick-and-mortar retailing has been greatly exaggerated. The middle of the market faces pressure, but companies serving high-end or discount niches can do fine, suggests Rich Moroney, editor of Dow Theory Forecasts.
Just ask Dollar Tree (DLTR), a super discounter planning to add 600 new stores this year. Improved finances and tailwinds in the form of lower Covid-related expenses, better cost controls, reduced store-manager turnover, and a refi ned merchandise mix all add to the bullish story.
Dollar Tree operates more than 15,600 stores across the contiguous U.S. and five Canadian provinces. Brands include Dollar Tree, Family Dollar, and Dollar Tree Canada. Dollar Tree stores typically offer a broad range of merchandise at a single price point — $1.
The Dollar Tree Plus! section sells products for $3 and $5, a concept that exceeded expectations in the January quarter and will expand from the current base of 120 stores to 500 by August. Dollar Tree also focuses on a differentiated product mix such as the rollout of its Crafter’s Square concept, which enjoys strong demand.
Same-store sales at Dollar Tree rose 2.4% in the January quarter. Covid lockdowns and the lack of events such as parties or social gatherings crimped results. Fortunately, January boasted the strongest monthly sales comparison since April 2019.
Family Dollar, acquired in 2015, presented a number of challenges for Dollar Tree in the early days of the combination. But the situation has improved in recent quarters. Same-store sales for Family Dollar, which typically offers products at $10 and under, jumped 8.1% in the latest quarter.
Improvements to the brand include an expanded merchandise mix, such as focusing on consumables and selling more produce and frozen foods in markets with few local grocery options; an expanded partnership with the Instacart delivery platform, which tends to generate higher average tickets; and store remodelings, such as a planned 1,250 Family Dollar renovations in 2021.
Overall, the company plans to add 400 Dollar Tree and 200 Family Dollar stores this year, including formats combining the Dollar Tree and Family Dollar brands under one roof.
This concept focuses on rural communities with 3,000 to 4,000 residents. Early results from the roughly 50 combo stores in operation have been promising, delivering same-store sales of greater than 20% on average.
For the year ended January, per share profits for the company rose nearly 19% on an 8% sales gain. For the current fiscal year, the consensus calls for a 9% jump in profits to $6.16 per share on a 3% increase in sales. Per-share results should get a lift from the company’s plans to buy back some $2.4 billion of its stock over the next two years.
Dollar Tree, trading at 18 times this year’s earnings estimate and with a Quadrix® Value score of 80, offers a compelling value as a leader in the discount end of the retailing market. The stock is a Long-Term Buy.
