The Crack in Dollar Tree's Armor

Dollar Tree is operating in the right place at the right time. What could possibly turn its good fortune around?

Jun 21, 2014 at 11:00AM


Source: Wikimedia Commons.

Dollar Tree (NASDAQ:DLTR) continues to impress each quarter with robust sales, same-store sales growth, and diluted earnings-per-share increases. This dollar chain credits in large part a budget-conscious and cash-strapped consumer filling up its stores looking for bargains. Further growth seems like a no-brainer, but there are two things to watch for that could become speed bumps on its road to further riches.

Opportunity is still vast
Dollar Tree believes the market can hold another 60% increase in its stores while simultaneously growing sales in each store more. It is finding ongoing sustainable success by adding perishable food, especially refrigerated and frozen goods, which Family Dollar Stores (NYSE:FDO) and Dollar General (NYSE:DG) have also seen success with.

The company also still owns a tiny chain of non-dollar stores called Deal$ that will help it penetrate the urban, higher-price-point market as it expands in this area. Deal$ does not have the $1 price tag restriction that the Dollar Tree chain has, and it allows Dollar Tree to compete with Family Dollar Stores and Dollar General directly within cities.

Opposite economic reactions
One difference that separates Family Dollar Stores and Dollar General from Dollar Tree is the companies' attitudes about the economy. Howard Levine, Chairman and CEO of Family Dollar Stores, said in its second-quarter earnings release that "a more promotional competitive environment and a more financially constrained consumer" is hurting Family Dollar Stores.

Similarly, Rick Dreiling, Chairman and CEO of Dollar General, mentioned in its first-quarter earnings the "heightened competition and the current economic environment." He explained that these factors were challenges for Dollar General.

It is this poor economic environment that is driving some people away from Family Dollar Stores and Dollar General over to Dollar Tree, where everything is $1 or less. What could possibly go wrong going forward for the company?


Source: Wikimedia Commons.

A spike in fuel prices
The savings from shopping at a dollar store are only good relative to the cost to get there, especially for truly budget-conscious customers. If nothing else, the sheer short-term shock of fuel price spikes has consumers making fewer but bigger trips to the stores and therefore making fewer of the impulse purchases that dollar stores depend on.

Flash back to 2005. This was the largest percentage gain in fuel prices since the 1970s. It was also the first year, and the last, of negative same-store sales for Dollar Tree. For the first quarter of 2005, same-store sales plunged 3.7% compared to guidance of flat sales given halfway through the quarter.

Bob Sasser, CEO of Dollar Tree, stated at the time, "Our customers have experienced and continue to feel the impact of higher fuel costs." In the company's report for the second quarter of 2005, regarding these negative same-store sales, Sasser stated, "Our customers continue to feel the strain of rising fuel costs, and they are responding with fewer shopping trips."

Same-store sales continued to suffer in the third quarter, only to finally start rebounding in the fourth quarter as consumers adjusted and became somewhat numb to the higher fuel prices.

Is a good economy Dollar Tree's enemy?
Remember that Dollar General and Family Dollar Stores cite the negative economy as a challenge, while Dollar Tree cites it as an advantage. It then stands to reason that an improving economy that is felt by the lower and middle classes could also be a negative headwind for Dollar Tree. Sasser made an interesting statement during the company's recent conference call. He stated:

"And then the talks about ... the unemployment issues, it remains high, there is always concern about ... how long the benefits are going to last until I get a job, so it's a worried and concerned consumer. I believe that we are well positioned as you can be."

"As well positioned as you can be" isn't exactly encouraging. It's possible that things are so good now for Dollar Tree that they can only get worse from here. 

Again, flash back to 2005 and even 2004. These two years saw the strongest growth in the economy in the 14 years since the tech bubble burst in 2000. They were also the two worst years in same-store sales growth for Dollar Tree, with just a 0.5% increase in 2004 and a 0.8% drop in 2005.

Coincidence? Perhaps, and we know that the company's results in 2005 were at least partly due to fuel prices. However, it also makes sense that more discretionary purchasing power from consumers might mean they are less budget-conscious and more likely to get household items at more traditional retail spots.

Dollar Tree should continue to grow and prosper in the long term. Just be wary that fuel prices or an overheated economy could create a temporary timeout for Dollar Tree's success. On other hand, it could prove to be exactly what Family Dollar Stores and Dollar General need to get their own success going again.

An improving economy could help make this a blockbuster
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information