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Is Dollar Tree Still a Good Investment?

By Ayush Singh – Mar 25, 2014 at 4:24AM

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Dollar Tree performed well despite challenges, but is it a good buy?

Discount retailer Dollar Tree Stores (DLTR -0.07%) reported good numbers for the fourth quarter despite bad weather conditions and stiff competition in the retail space. It worked hard to cover the damages caused by the cold wave that swept the nation.

Although net sales were marginally down for the quarter from the year-ago period due to an extra week last year, comp sales were up 1.2%. So, despite facing competition from other dollar stores such as Family Dollar Stores and retailer Wal-Mart Stores (WMT -0.34%), Dollar Tree performed well.

Showing resilience
The company's strategies have helped it to perform well so far. For instance, comp sales increased in the most recent quarter due to increased traffic and in spite of the bad weather conditions. A shift in the Halloween and Thanksgiving celebrations resulted in a fourth-quarter loss of $30 million, but Dollar Tree remained resilient due to its merchandising initiatives. 

The bad weather also had a deep impact on Dollar Tree's operations. Successive winter storms adversely affected around 33 days out of the 91-day quarter. In December, more than 700 store selling days were affected due to nature's havoc. And there was no relief for the retailer in January either, with the number increasing from 700 to 2,000 store selling days. In spite of such headwinds, Dollar Tree posted a 4% rise in December comp sales.

Looking forward, Dollar Tree management is quite positive and hopes to post solid growth; it has undertaken different initiatives to execute this.

Smart strategies
Dollar Tree's wow-table concept at the front of its stores has been driving sales. The retailer displays products based on customer needs. Its tabletop promotions, such as glassware, dinnerware, etc. have proven to be big hits.

Moreover, Dollar Tree goes for targeted promotions, depending on the occasion. It recently created a new event called "the last 10 days" in which it combines all the last-minute categories, resulting in a remerchandising of the front of the store. Management will continue following this strategy every quarter to make the most of the different occasions.

Dollar Tree's inventory-management team ended last fiscal year with less average inventory per store than the preceding year. In addition, its merchants and logistics teams appropriately allocated and replenished stores, due to which it has started fiscal 2014 with lean inventories. The presence of lean inventory levels should enable Dollar Tree to expand its margins, as fresher inventory entails lower markdowns. In addition, Dollar Tree's costs were also well managed, with selling, general, and administrative expenses falling from 21.7% to 21.3%.

Expansion plans
In terms of Dollar Tree's expansion plans, it opened 51 new stores in the fourth quarter and relocated four. In 2013, it had added 343 new stores and ended the quarter with 4,992 total stores. The store-opening plan for 2014 looks even more impressive. Dollar Tree plans to open 375 new stores across the U.S. and Canada, and these locations are expected to be more productive than last year's lot. 

Also Dollar Tree's "deals" format gives it the flexibility to serve more customers with a wider range of products; items in such stores do not have the $1 restriction. As a result, the company is looking to expand the deals concept. Dollar Tree sees enormous potential in Canada. It opened 41 new stores north of the border last year but believes that the Canadian market can support up to 1,000 stores.

Dollar Tree's foray into Canada will be helped by big-box discounter Target's (TGT -0.33%) troubles in the country. Target's data-breach issues, inventory problems, and lack of popular brands handicapped the company's progress in Canada. In addition, Target's regional pricing strategy didn't help, as customers found its products to be more expensive when compared to Target stores in the U.S. So, Dollar Tree can capitalize on Target's missteps through its broad portfolio and cheap pricing.

A potential challenge
However, Dollar Tree faces competition from big-box retailer Wal-Mart, which is opening smaller-concept stores known as Express and Neighborhood Markets. Comp sales at Wal-Mart's smaller-sized stores were up 4% last fiscal year, while overall comp sales fell 0.4%. Encouraged by this performance, Wal-Mart is now planning to open 300 Wal-Mart Express and Wal-Mart Neighborhood Market stores by year-end, leading to more competition. 

Bottom line
Dollar Tree performed well despite bad weather in the fourth quarter. This displays its resilience and management's capacity to take the company through troubled waters. With its expansion plans in place across the U.S. and Canada, Dollar Tree can perform even better in the future. Also, the company's strategy to drive sales as stated above could be another catalyst. However, investors should keep an eye on Wal-Mart's small-store strategy, as it could pose a threat to Dollar Tree. 

Ayush Singh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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