This Dollar Store Is Worth Betting on for the Long Run

After a slow start to the year, this dollar store is making a strong comeback.

Jun 12, 2014 at 4:34PM

Dollar Tree Stores (NASDAQ:DLTR) is making a comeback. The discount retailer had a sluggish start to the year, but its recent first-quarter results have breathed new life into the stock. Dollar Tree shares have gained close to 10% since the company released its latest results on May 22, and given sluggish consumer confidence in the U.S., the performance might improve further. 

However, Dollar Tree will have to fight  Wal-Mart Stores (NYSE:WMT) and Target (NYSE:TGT), which are now focusing on smaller stores. So, will Dollar Tree's resurgence continue despite stiff competition?

Turnaround in progress
Dollar Tree reported solid results for the first quarter, with earnings of $0.67 per share matching the consensus estimate. Its performance was driven by 19% year-over-year increase in store traffic and growth in the discretionary and consumables segments. However, no specific numbers were provided. Going forward, Dollar Tree has aggressive expansion plans in place with new store openings in the cards.  Management is confident about the business model being immune to economic headwinds. Dollar Tree offers a balanced product mix to consumers (based on their daily needs) along with high-value seasonal and basic discretionary products. 

As a result, the company was able to overcome the effect of the harsh winter weather. Cold weather conditions had a severe impact on its merchandise flow, which resulted in higher-than-planned costs across freight, logistics, and utilities. However, as the weather improved, Dollar Tree's sales gained momentum. The company reported its strongest sales in the month of April amid a strong seasonal performance due to Easter, and this continued in the month of May as well. 

Smart strategies
Dollar Tree has various strategic plans up its sleeve. These include opening more stores, increasing productivity of existing stores, and developing new formats. These plans, if executed well, will boost the performance of the company. During the first quarter, Dollar Tree opened 94 new stores and expanded 28 existing locations. For the full year, the company plans to open 375 new stores and to expand 75 existing locations. 

Apart from new store additions, Dollar Tree also increased its product assortments. Customers can now find a wide variety in categories such as candy, stationery, health, beauty/eyewear, and home and household products. It has also started offering frozen and refrigerated products. These are expected to increase shopping frequency among customers and to provide the retailer with more of an opportunity to increase sales across all categories. 

Dollar Tree is also focusing on new store formats along with international expansion. This includes Deal$, Dollar Tree Canada, and Dollar Tree Direct. Deal$is a strategic expansion by Dollar Tree, as it lifts the restriction of $1-priced products. This enables it to serve more customers with a wide array of products at value prices every day.

Dollar Tree's international expansion is also progressing well. Under Dollar Tree Canada, the company opened 11 new stores during the most recent quarter, taking the tally to 189. Management cites immense potential in Canada and believes that the Canadian market can support around 1,000 Dollar Tree stores. 

In addition, Dollar Tree Direct, its e-commerce business, is also expanding at a fast pace. It enables Dollar Tree to widen its customer base, increase sales, expand the brand, and ultimately attract more customers. To support its e-commerce growth plan, Dollar Tree is investing in infrastructure. It has expanded its distribution center in Illinois by 250,000 square feet, which brings its total size to 1.4 million square feet. 

The space is about to get more crowded
Dollar Tree's expansion moves are important, as the company is likely to face stringent competition from Wal-Mart and Target, both of which are focusing on smaller stores. Wal-Mart, for example, is aggressively pushing its Express and Neighborhood Market formats. These stores are only a fraction of a typical Wal-Mart supercenter in terms of size, which is why they can be opened in smaller neighborhoods and residential areas.

This concept is already working for Wal-Mart, as the retailer saw a 4% increase in same-store sales at its smaller-sized stores last year. Wal-Mart has announced plans to open around 300 locations based on these two smaller-size concepts, up from its prior target of 120-150 stores.

Target is also following in the footsteps of Wal-Mart with its TargetExpress concept. In January, Target announced that it will start testing its small-store concept near the University of Minnesota campus in Minneapolis. This store will be 15% the size of a regular Target store and will be strategically located to serve students and the urban population from nearby neighborhoods.

If this concept clicks, Target might also aggressively open small-sized stores, making the discount-store space even more crowded.

The takeaway
Dollar Tree is making impressive moves. Its smart pricing strategy and expansion moves should result in a better performance going forward and should help it stay ahead of the incoming competition. It would be a good idea for investors to bet on Dollar Tree's turnaround, as it will continue improving going forward.

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Shirish Mudholkar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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