Although the decision by Dollar Tree (DLTR +0.26%) to catapult itself to the forefront of the industry by gobbling up rival Family Dollar (FDO +0.00%) applied some pressure to its second-quarter financial results, even without the acquisition -- which isn't a sure thing yet -- it's still a leading player in the discount variety store space that continues to find new ways to grow.
Money does grow on trees, Dollar Trees that is.
For investors looking for confirmation that the Dollar Tree growth story remains intact even if Dollar General (DG +0.09%) manages to change Family Dollar's mind and get it to ditch Dollar Tree and hitch up with it -- Family Dollar this week rejected the General's initial $8.9 billion offer in favor of Dollar Tree's lower $8.5 billion bid -- Dollar Tree management offered up at least five takeaways during its recent earnings conference call to be particularly aware of going forward.
Look for more stores
Even without the Family Dollar acquisition, you can expect to see more Dollar Tree stores coming to your area, as it plans to develop new formats in new markets and new channels as growth vehicles for the future.
It currently operates 5,166 stores across 48 states and five Canadian provinces, less than half the size of the biggest deep discounter, Dollar General, which runs 11,338 stores in 40 states, and putting it in third place behind Family Dollar, which operates 8,200 stores in 46 states. But management thinks Dollar Tree can eventually support 7,000 stores in the U.S., plus another 1,000 in Canada. CEO Bob Sasser says, "Our goal is to be recognized by customers as the leading retailer in Canada at the single price point of $1.25 just as we are in the U.S. at $1 price point."
It opened 90 new stores in the second quarter, relocating and expanding 20 existing stores, for a total of 110 projects. It closed four stores in the quarter. For the full year, it plans on opening 375 new stores while relocating and expanding 75 additional ones for a total of 450 projects across the U.S. and Canada.
That kind of growth is possible because Dollar Tree is more profitable than the competition. Even as it's given up some points to continue driving traffic, the discount variety chain still stands well above of the competition.
Dollar for dollar, Dollar Tree runs a profitable operation. Data: Morningstar.
A productive use of time
At the same time that it's expanding its footprint it's also making the square footage more productive by expanding the categories offered. Already customers are finding pet supplies, hardware, health, beauty, and eyewear a valuable commodity at the dollar store chain, all of which helped drive its sales higher in the quarter. They also happened to be among the departments seeing the largest comparable sales too.
Stretching a dollar has been a lot easier at Dollar Tree as it bulks up on value.
One way it's helping the customer to find more is by increasing the size of the product sold even though the price point remains the same. For example, Dollar Tree stocks king-size candy bars instead of regular-sized ones, or offers an 18-ounce size instead of 12 ounces, but still selling for a dollar. And it's bringing in more brand names like Dawn and Palmolive in home goods or Stax potato chips in food and snacks.
Finding bigger sizes or brand name goods cheaply priced ensures customers are going to want to return to buy more. As Sasser says, "throughout the store, we've expanded in more space and more inventory and more of the things that our customers are looking for in a tough time."
Writing your own ticket
Those tough times are nothing to ignore, but even though other retailers bemoan weak or lost traffic, Dollar Tree has continued to increase the foot traffic it sees in its stores. No doubt it's because of the greater assortment of goods customers are finding on its shelves, which also happens to have the happy effect of increasing the average ticket (what people spend) in the store.
Tisket a tasket, Dollar Tree is witnessing a growing basket.
Says Sasser, "So as more people are shopping more frequently, our traffic is up; as they're staying longer and they're buying more, our average ticket is up."
Helping to increase Dollar Tree's average ticket is its Deal$ stores, which sell goods above a dollar. Where the average ticket at its namesake stores was around $7.80 in the second quarter, at Deal$ it was $9.51. Moreover, the average ticket with items that were greater than a dollar was $14.23, with over half of all transactions having items more than a dollar as well. Expect to see the Deal$ concept built out even more.
But the growth comes at a cost
Despite industry-leading margins and greater traffic, Dollar Tree has had to actually give up some profits to keep customers coming in the door. Since it's head-and-shoulders above the competition it's not much of a concern at the moment, but is something investors need to keep tabs on.
By going with brand-name goods, for instance, Dollar Tree gives up a little bit in profit. But if it means it will keep volume growing then it's a good trade-off for the company. As Sasser explained, "we're always balancing the name brand offering with the private label name brand equivalent offering ... when given the choice between the brands, all things equal, [customers] like the brands."
It's also making sure it's stocked up on the first of the month because Dollar Tree found that when the payroll checks hit the bank accounts consumers like to hit the stores. Being able to find a product on the shelf when they want to buy it helps keep the sales growing.
One cost beyond its control, though, has been freight transport, due to a shortage of truck drivers, a problem that's been building up for some time, but hit the deep discounter all of a sudden during the quarter causing freight expenses to increase by nearly 40 basis points.
Have a cold one on me
One of the not-so-secret successes of Dollar Tree's growth has been the expansion of refrigerators and freezers that serve to drive more customers to buy more frequently. After adding them to 141 more stores in the quarter, it now has frozen and refrigerated products in 3,410 stores, or two-thirds of the total, with plans to keep building them out.
Sure, they tend to be lower-margin products, which is going to eat into the margin numbers just as brand-name goods will, but because they're stocked with consumables the customer comes back more frequently.
Sasser points out the "merchandize mix in our Deal$ stores is little different than what you find at Dollar Tree," with consumables comprising 62% of the items sold at Deal$ while Dollar Tree is split pretty evenly 50-50.
Foolish takeaway
Sales are up, margins are still leading the industry even if Dollar Tree's given up a point or two, comparable sales remain strong, and customers keep coming back, driving up the amount of the basket their buying. Even if it's not successful in acquiring Family Dollar, though at this point the deal seems on track, investors can expect to see Dollar Tree continuing on the growth trajectory they've come to expect.
