Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Increasing Competition Could Lead to Trouble for This Dollar Store

By Harsh Chauhan - Mar 15, 2014 at 7:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Will Wal-Mart and other dollar stores throttle this company's growth?

Dollar Tree ( DLTR 1.64% ) is facing a lot of heat. Things haven't improved for the discount retailer, as its recent fourth-quarter results and the accompanying guidance show. The company continues to struggle due to a variety of reasons. Moreover, as rivals Dollar General ( DG 2.87% ) and Wal-Mart ( WMT 1.51% ) continue their expansion spree, Dollar Tree could be in for troubled times ahead.

Short-term headwinds
Dollar Tree missed consensus estimates in the previous quarter due to a shorter holiday selling season and bad weather. Management claims that 700 store selling days were negatively affected in December due to extreme weather conditions, and the trend continued in January with 2,000 store selling days affected.  However, Dollar Tree management believes that their strategies should work well in the long run, which is why they are confident of long-term growth.

But then, Dollar Tree's outlook for the ongoing quarter and the full fiscal year left a lot to be desired. The company expects earnings between $2.91 and $3.13 per share on revenue of $8.35 billion- $8.58 billion. These are well behind what analysts were expecting -- earnings of $3.25 per share on revenue of $8.6 billion.  This could be due to the fact that Dollar Tree's 2013 class of stores were not as productive as stores that were opened in 2012. The company saw a decline in store productivity due to the various reasons mentioned above, but it believes that things should get better as the year progresses.

Growth won't come easy
Going forward, Dollar Tree is focused on increasing store productivity through the development of new formats, and penetrating new markets and channels. It is planning a 7% increase in square footage this fiscal year, and is aggressively equipping its stores with coolers and freezers to drive sales of consumables higher. Consumables play an integral role in driving profits of the dollar stores, so it is quite natural for Dollar Tree to invest in this area. So, as Dollar Tree expands by 375 new stores this year, it should be able to capture more of the market.

However, this isn't going to be as easy as it sounds. Dollar Tree isn't the biggest discount store out there. With around 5,000 stores, it has fewer than half the stores of Wal-Mart and Dollar General. Size will matter in this industry, since the retailer with a higher number of stores will be able to serve a higher number of customers. So, while it is clear that Dollar Tree is expanding its store base and square footage, its rivals are also doing the same on a war footing.

Dollar General plans to open 700 stores in fiscal 2014, apart from relocating or remodeling 525 stores in an effort to boost productivity and profit. The company aims to grow its square footage by 6%-7% this fiscal year, which is almost on a par with Dollar Tree. Dollar Tree's smaller size isn't necessarily an advantage.

Moreover, Dollar General's move of selling tobacco is also helping sales. The company's revenue was up in the double digits in the previous quarter, increasing 10.5%, year over year. In comparison, Dollar Tree's sales in the previous quarter came in at $2.23 billion, a marginal drop from $2.25 billion posted in the year-ago period. In addition, Dollar Tree's same-store sales growth of 1.2% in the previous quarter lagged Dollar General's 4.4%. Dollar Tree's metrics aren't impressive, especially considering the fact that the stock is slightly expensive, as compared to Dollar General.

With the rollout of Wal-Mart's Neighborhood Markets and Wal-Mart Express this year, Dollar Tree's prospects could take another hit. The retail giant is planning to open 270-300 smaller-sized stores in 2014 as it looks to expand its footprint and tap the opportunity from which the dollar stores have benefited so far. In fact, same-store sales growth at Wal-Mart's small-box prototypes was 5% last year. The addition of Wal-Mart in the dollar store market will intensify price competition further, pressurizing margins of the dollar store chains.

Wait and watch
Dollar Tree has the best profit margin of all discount retailers at 7.61%. Both Dollar General and Family Dollar lag, with profit margins of 5.93% and 4.22%, respectively. So, Dollar Tree can afford to take a slight hit and continue its expansion efforts and aggressive pricing to ward off competition from rivals. But, Dollar Tree doesn't look like a sensible investment as of now since it is the most expensive stock in its peer group. So, it would be wise to wait and see how Dollar Tree copes up with the intensifying competition.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$137.51 (1.51%) $2.04
Dollar Tree, Inc. Stock Quote
Dollar Tree, Inc.
DLTR
$137.04 (1.64%) $2.21
Dollar General Corporation Stock Quote
Dollar General Corporation
DG
$222.00 (2.87%) $6.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/05/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.