Thursday, November 19, 2015

Shaking The Dollar Tree

Some Dollar Tree Stores, Inc. (NASDAQ:DLTR) shareholders decided to “shake the tree” with a sell-off over the past few days. As a long investor in Bob Sasser’s management style, I found the exercise laughable. It provided an excellent opportunity to purchase more shares of DLTR at a discounted price. This is precisely the purpose of these stores themselves, to obtain bargains unavailable elsewhere.

Dollar Stores Virginia 1492250

Dollar Tree's acquisition of Family Dollar must have some analysts and investors sitting uncertain out there on a long branch. I see a firm going from approximately 8,000 stores to 16,000. Right now Dollar Tree operates 14,038 stores (this includes stores that may still look like the one pictured above). This is not exactly HP buying Compaq. Dollar Tree management made it clear long ago they were to going to a store count of over 20,000, well before the Family Dollar deal was announced. It is clear there was plenty of planning and number-crunching long before the $8.5 billion offer was made.

Of course operating costs will go up, but not nearly as much as if they had to outfit and staff all those stores starting from empty buildings. I understand Dollar General is larger, I'm also concerned about operating expenses at that firm. I once helped a logistics firm set-up 11 new sorting and distribution centers all over the U.S. The costs involved were incredible. But I documented standard operating procedures and learned from each new facility. By the time the last few of the 11 centers were started all members of team knew exactly what to do after getting the key from the commercial realtor.

Dollar Tree’s business model works so well because people remember the experience in each store fondly. I often see people shopping together in Dollar Tree outlets, more than I see in traditional grocery stores. More Dollar General stores seem to stand alone out there in lot by themselves or with only one other business whereas Dollar Tree stores sit near other businesses people frequent. Family Dollar facilities appear in both locations. It’s the psychology of belonging to something as opposed to going it alone.

Economic recessions drive new customers to discount stores, well actually most people drive themselves there. Even the perception of a financial crisis or a personal financial issue, like unemployment, raises consumer awareness of bargain shops. New immigrants or people that have just relocated need to keep expenses very low. Customers look around the shopping centers or communities where stores are located. They look at the store itself. Does the shopping center look safe? Is the outside of the store clean? Is the parking lot well-lit or easily accessible from a main highway? Is there a parking spot somewhere near the entrance?  My family’s experience with Dollar Tree is “yes.” Keep in mind all these are perceptions formed before the consumer gets into the store.

As you approach a Dollar Tree store two other experiences are likely to happen. First you will see someone leaving the store, talking on their smartphone, telling a friend about the deal they just found. Customers of discount stores appear to enjoy chatting and texting about new-found bargains. Second, you may encounter other customers just arriving to shop. They have little check-lists of the items they need or want for an upcoming party. They may have a list on their smartphone. Note: Dollar Tree should have an app that lets customers create a list while the app matches those items up with similar items in stock in the store.

Finally you enter a well-lit retail space that you can easily navigate in a few minutes. Remember you only have a few minutes to shop to get home in-time to start dinner and get everything going before your show or game comes on. Traditional grocery stores have grown the size of airplane hangers. Sam’s Clubs in Houston may even have a row of 777s somewhere in the back. The point I am making is that many consumers don’t have the time or energy to navigate superstores after a day of navigating hallways or offices at work. Dollar Tree is doable, it has good food I can find and prepare at home easily. If I happen to pick-up a pack of pencils, crayons or notepads to take to the kids in Haiti, so be it!

There is also the surprise factor with discount stores that Dollar Tree does better than most. What an incredible deal, well, always a dollar, on something I did not even plan to buy! I can afford a buck. What I cannot afford is the $4 jar of blackberry jam on aisle 17. I don’t have the $8 for the large container of laundry detergent but Dollar Tree will sell me enough soap to get to payday.

Some investors wonder if consumers quickly abandon Dollar Tree stores after they get a better job or a raise. Will rising stars switch to Whole Foods? I doubt that is the case at all. Promotions and more income nearly all come with greater demands on your time. Instead of driving home from the office you are now just getting off a flight from Chicago, there’s even less incentive to enter a big box store. It appears to me that rising stars remember the bargains they always find and return Dollar Tree, only to buy even more from this source than they did in the past. It’s not the Food Bank or anything that might indicate you are struggling but Dollar Tree is a destination some people go after the food bank. They head there to get the items they still need but were not at the food bank, like that container of laundry soap.

Lower prices at the gas pump leave consumers with more dollar bills to spend but not twenty buck notes. Dollar Tree does not depend on people coming in to buy a pack of smokes. They don’t sell cigarettes, a low-margin item anyway. Personally I don't like shopping where lung cancer is sold. Smokers often switch between 7-11 stores and Dollar General, depending on pricing, need and convenience. Margins are where Dollar Tree typically beats the competition, that’s what I look for during my research. The purchase of Family Dollar will enable even larger bulk orders of key products. As long as suppliers can eke out the economies of scale, Dollar Tree’s purchasing agents will keep finding them.

Dollar Tree customers are not so brand dependent. Like folks that shop at Aldi stores, these consumers look for quality even if they’ve rarely bought products with an unusual label before. Aldi shoppers have even grown comfortable with tags that say "Made in Croatia or Israel or Morocco." Europe is way ahead of North America in this regard. Much of what stocks the shelves in Dollar Tree stores seems to come from the U.S. though Asia is well-represented too. Savvy shoppers now look closely at the actual product and buy what they need, not always what a TV or magazine ad told them to buy. Coupons, paper at least, are a hassle that I don't see younger consumers hauling out at the register. Groupon? Well that's fodder for another column. I know Internet shopping is growing but not for small packages of frozen vegetables you will eat tonight.

Those concerned with the Dollar Tree's Deals stores may be comforted to learn of plans to roll the chains 200+ stores under the Dollar Tree logo. I don't have any idea of what will happen to that one West Park, Florida Deals store with a pharmacy. I am skeptical of those $200k pharma store add-ons though I do expect to see pharmacies in discount stores very soon.

I also expect Dollar Tree to do what it always does, head back up past 80 and beyond. It will split if it does go up over my current price target of $100. My original shares have gone through two splits, a 3:2 and and 2:1. They like to price things around 100!  If you look at the price history, without the adjustments for stock splits, the stock looks even more exciting. Dollar Tree's one-year (8%, even now), 5-year (150%) and and 10-year performance are quite interesting. Mr. Sasser and his team can handle the additional outlets Family Dollar brings, if not they will close redundant locations. It has to do with closely watching market growth. They maintain a very efficient strategic network of distribution centers. The firm is headquartered in Chesapeake, Virginia, one of America’s fastest-growing communities. Those are all important features that contribute to the success of a business that helps people get good buys, no matter what the size of their paycheck is. That is something worth talking about.

(The author has held Dollar Tree shares for the past ten years. As a Tidewater local, he has followed the firm since the "Only $1" days. 
The oldest of those shares are up 750%. He is not employed by any firm with any interest in Dollar Tree or affiliates.  That said, any stock can rise or fall at any time, for reasons few can explain. Invest wisely.)

1 comment:

TH Williams said...

Author's Note: Dollar Tree, Inc. (NASDAQ:DLTR) is up over 6% after announcing earnings this morning. The stock is up nearly 19% over the past 5 days.