Dollar Tree (DLTR -0.57%) should be doing better than it is during the coronavirus pandemic. As an essential business allowed to stay open when others have been forced to close, the deep discount chain has seen a substantial lack of interest in its goods by consumers.
As states begin to reopen their economies and businesses are allowed to compete again, Dollar Tree may continue to lag behind its rivals. More importantly, though, where will we find the retailer a year from now?
Image source: Getty Images.
A rocky start
Dollar Tree's performance leading up to COVID-19 being declared a pandemic was not inspiring, as comparable sales rose an anemic 0.4% in the fourth quarter. After it updated its first-quarter results almost a month later, however, business was slowing down considerably.
Where comps had jumped at both Dollar Tree and its outlet Family Dollar -- and by double-digit rates at the latter -- leading management to say it would hire 25,000 new employees, they ended up tumbling sharply heading into the last week of March, plunging almost 20% at Dollar Tree.
Although management blamed the Easter holiday, it also curiously closed down its e-commerce business, an outlet many retailers have found to be a lifeline during the pandemic to offset store closures. Although the sub-$10 price level for the vast majority of its goods across both chains are not especially suited to the e-commerce channel, at least not profitably for the retailer, it is an important outlet nonetheless during this period.
Dollar Tree subsequently said its business for the rest of the quarter could be hampered by it potentially not being able to restock, and since many of its stores are in states with stay-at-home orders in place, consumers have seemingly been reluctant to visit.
It's possible they could return as restrictions are eased, but they also may have found other outlets to shop at that adequately met their needs.
A tough market...
Dollar Tree isn't going away, regardless of the troubles it's facing. Those woes are not fatal to it and can be rectified over time.
The deep discounter has significant financial resources available to it, having $1.9 billion in cash and investments as of March 30, with $1.3 billion available on its revolving credit facility. While its $3.5 billion in long-term debt is a drag, Dollar Tree remains in good shape otherwise.
Still, it faces challenges, especially from rival Dollar General (DG -0.36%), which seems to be firing on all cylinders and announced its own intention to hire 50,000 new workers.
The leading dollar store chain hasn't run into the kind of problems that faced Dollar Tree, and not having the burden of trying to turn around an ailing business -- as Dollar Tree has had to with Family Dollar -- has allowed Dollar General to invest in its business more efficiently. It's helped the retailer post 30 consecutive years of positive same-store sales growth.
...but the right business
In Dollar Tree's favor, the discount store model has a long runway for growth, and the treasure hunt nature of its stores remains exceptionally popular with consumers.
With over 15,000 stores and a plan to open more after the pandemic passes, Dollar Tree's broad geographic coverage makes it particularly convenient for cash-strapped consumers. With over 33 million people unemployed, even as they're brought back to work Dollar Tree should be a destination for many of them looking to stretch their paychecks further.
It's likely why it was able to see the big spike in comparable sales in the first weeks of the pandemic, even if that growth surge stalled.
Where will it be in a year?
Dollar Tree's stock is down 35% from its 52-week high, and it trades at a fraction of its sales, a level it hasn't been at in at least a decade.
That suggests there is a lot of upside potential in this retailer. It had been on the path toward repairing the Family Dollar chain before the virus outbreak, and the stores were actually doing better than Dollar Tree's namesake stores afterward. It would be somewhat ironic if Family Dollar led the deep discounter's way forward, but would underscore management's belief it was a business that could be fixed.
Investors should expect to see Dollar Tree at a higher price from here, but there still might be better opportunities than this one.
