Another quarter of strong sales growth by deep discount variety store leader Dollar Tree (DLTR 0.31%) validates its premise that it can deliver value to consumers for $1.
That it continues to be the most profitable of the major dollar store chains, even though Dollar General (DG 0.81%) and Family Dollar (FDO.DL) give consumers a seemingly broader variety of goods at different prices suggests Dollar Tree already "own the seasons at the $1 price point." Management, though, wants you to remember these five things as well.
It's been more than just pennies from heaven as consumers respond to the discount store's value proposition. Photo: Flickr via Mike Mozart
1. Freezers and coolers are key to future growth
Dollar Tree now has frozen and refrigerated products in over 3,500 of its 5,282 stores, having added freezers and coolers to 133 of them this quarter. For all of 2014 it plans to have 460 stores outfitted with refrigerators, which will be a key component of future growth plans because they help lift sales storewide.
When freezers and coolers are installed, Dollar Tree sees anywhere from a 5% to 10% lift in sales, not just in consumables, but across all categories. Because they tend to drive more trips to the store they result in faster turnover of inventory and more frequent purchases, even though the frozen and refrigerated items themselves are lower margin.
2. Canada is a big market opportunity
Consumers to the north enjoy a bargain every bit as much as they do in the U.S., eh. Image: Dollar Tree Canada
Just as it's the $1-for-everything leader here at home, the Dollar Tree Canada price point is $1.25, which, of course, is in Canadian dollars. That was the pricing feature when it bought Dollar Giant and it translates well to a similar value proposition for Canadian consumers, who face higher costs and expenses than they do in the U.S.
Dollar Tree has proven it can run the business in terms of product and margins at these price points, and has plans to raise them, particularly here in the U.S. Consumers should worry that Dollar Tree will soon become the Buck-and-a-Quarter Tree anytime soon.
3. Online represents a new avenue for expansion
Dollar Tree Direct is an additional iron the dollar store chain has in the fire. It gives the discounter an opportunity to broaden its customer base and drive incremental sales, all the while expanding brand awareness, which can only help drive more customers to its stores.
In connection with the online store, Dollar Tree realized the channel was how customers located nearby stores so it initiated a local search feature in the third quarter. Moreover, it needed to improve how it appeared in certain categories when consumers were conducting local searches for things like "party supplies." It's revamped capabilities should now allow it to build upon its position to dominate these categories.
Further, it is now including craft sections on its site and helpful instructional videos that ought to make Dollar Tree an online destination as well as a physical one.
4. Freight costs are a bigger headwind than expected
The West Coast port truckers strike continues to weigh on results, increasing freight costs for Dollar Tree and the rest of the retail industry. While the discounter has been able to offset a lot of the increases by controlling costs elsewhere -- and it's been helped in part by the dramatic fall in gas prices -- Dollar Tree still expects there to be a significant headwind from the effects of the strike and the truck driver shortage in the fourth quarter.
5. Their guidance is probably very conservative
Considering the strong performance the deep discount chain has enjoyed over the first nine months of 2014, one might expect its forecast for the rest of the year to be even stronger. But management chose to take the conservative route because the original guidance it gave at the start of the year didn't anticipate such higher costs like those imposed by freight.
It also foresees product margins being pressured, so other than taking into account how the company has performed over the course of the year, it really hasn't changed its outlook for 2014. But with one more shopping day than last year in the traditional period between Thanksgiving and Christmas, and some easier comps to go up against from last year, don't be surprised if Dollar Tree once again exceeds expectations.
Money growing on trees
Dollar Tree had a strong third quarter and will likely have another one with the fourth. A consumer that still feels threatened and pressured by macroeconomic conditions will continue to respond to the dollar store's value proposition. Foolish investors interested in shares of Dollar Tree should take heart with these five key points that the company's management wants investors to be aware of.
