The Secret Way Dollar Tree Is Getting You to Spend More

Dollar Tree’s strength is coming in part from an unexpected area.

Jun 15, 2014 at 10:04AM

Source: Dollar Tree.

Dollar Tree (NASDAQ:DLTR) maintained its recent tradition of fantastic results with its first-quarter report. This dollar store overcame difficult headwinds from the weather. While its strategy of offering seasonal and fresh, changing merchandise is helping to power the chain forward, something else is baiting traffic to come through the doors in record numbers.

The sturdy-as-a-tree results
Dollar Tree reported fiscal first-quarter results on May 22. Net sales jumped 7.2% to a record $2 billion. Same-store sales popped 2%. Earnings per diluted share climbed 13.6% to $0.67. Both traffic and average ticket grew during the quarter.

Bob Sasser, CEO of Dollar Tree, credited candy, checkout products, stationery, and seasonal holiday merchandise for the gains. He commented that the chain's merchandise has a "balanced mix of consumable products and exciting variety merchandise" that is "fresh and clean."

Snow is bad, but cold is good
During the conference call, Sasser offered further insight. He said the results would have been even stronger if not for the "unusually long and harsh winter" that continued well into March. This not only negatively affected customer traffic, it resulted in higher freight costs to get merchandise into stores in affected areas.

To prove that Dollar Tree wasn't just making excuses, Sasser pointed to two pieces of evidence. First, as the weather cleared up, sales improved. He noted that the third month in the quarter, April, saw the best weather and the highest same-store sales, and this continued into May. Second, he pointed out that in the Southeast and Southwest U.S., where there wasn't much of a weather impact aside from the cold, same-store sales were the strongest, while the weakest were in the Northeast.

Logistics Distribution Center

Source: Dollar Tree.

Speaking of cold, perhaps the most exciting Dollar Tree category is frozen and refrigerated food products, which seems to go a bit unnoticed. These products still make up a minority of sales and also offer lower profit margins than other merchandise in the stores. Yet they're the most promising.

Why cold food is the most promising
The key with cold and frozen food is that it lures customers into the stores and lures them in more often. As Dollar Tree becomes known as a place where customers can get eggs, frozen waffles, ice cream, orange juice, and other frequently consumed items, those customers will end up spending money on other impulse items while they are in the stores as well, even though they may have originally just come in for food.

Dollar Tree currently has over 5,000 stores, and as of last quarter 3,269 of them offered refrigerated and frozen products. The company plans to add this offering at 320 more stores this year. Sasser stated on the conference call that this gives customers a reason to return more often. He added, "This increase in shopping frequency provides the opportunity to increase sales across all categories including our higher margin discretionary products." 

Logistics Transportation

Source: Dollar Tree.

Foolish final thoughts
Look for Dollar Tree to continue to lift same-store sales. Offering more food not only increases the company's food sales, it indirectly lifts sales of all other products. Checkout products, for example, were one of the best-performing categories last quarter and are a function of impulse enticement due to increased traffic. Not surprisingly, Sasser stated, "We continue to grow our frozen and refrigerated [offerings] as well as our snacks and beverages [offerings]." It will be interesting to see how much same-store sales growth will take place in the quarters ahead.

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Nickey Friedman 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.

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