Images

Dollar Tree may be the smallest of the big three dollar store chains but it towers over its rivals in several key categories. Photo: Flickr via Nicholas Eckhart. 

Deep discount dollar store leader Dollar Tree (NASDAQ:DLTR) had one of its best quarters in years. It recorded same store sales growth of 5.9% in the third quarter, marking its biggest increase in comps since 2011. Profit margins also widened by 40 basis points over last year's third quarter. 

Dollar Tree continues to be the leading dollar store chain among the Big Three, even though it's the smallest in terms of number of stores.
 
Here are three key ways it can continue to be the industry leader.
 
1. Freezers and refrigerators mean cold, hard cash.
After installing freezers and coolers in 133 additional stores in the third quarter, 67% of Dollar Tree's total store base offers refrigerated and frozen goods. But it won't be able to install the equipment in all its stores because it needs at least 8,000 square feet for optimal presentation. Some shopping malls also have exclusivity agreements with tenants for refrigerated goods.
 
The freezers and coolers allow Dollar Tree to grow sales and earnings by increasing the number of shopping trips made by its customers. Where they are installed, the stores see sales jump anywhere from a 5% to 10%. And it's not just in the refrigerated products segment -- transactions across all categories rise.
 
They also allow it to make up in volume what it loses in profits. Refrigerated items tend to be lower margin goods, but customers pick up other items while in the store. This helps explain why profit margins continue to expand.
 

Images 

Simple is as simple does. Dollar Tree scores with consumers by keeping pricing easy to budget. 

 
2. Pay-one-price remains the main difference with its rivals.
Deals gives Dollar Tree the opportunity to go beyond the $1 price point and expand product assortment. But because there are only 219 Deals stores open, the concept's contribution is limited. And though it continues to add more them each quarter, its namesake Dollar Tree stores remain the primary driver of sales and profits.
 
That kind of pricing separates it from Dollar General (NYSE:DG) and Family Dollar (NYSE:FDO) that actually have higher price points on the majority of their goods. Dollar General only offers about a quarter of its items for $1 or less while Family Dollar sells just 22% of its products at that price point.
 
So despite their name, Dollar Tree's rivals are more like deep discount department stores than dollar stores. It's why Dollar General believes its acquisition of Family Dollar will let it better compete against Wal-Mart (NYSE:WMT).
 
That gives Dollar Tree an advantage as flat pricing allows customers to better budget their money each trip. 
 
3. Every month is a new opportunity to connect with customers.
Dollar Tree benefited from the back-to-school season, Halloween, and a 28th-anniversary sales celebration this past quarter. Customers bought school supplies like pens, paper, and notebooks, and candy was a large discretionary spending category that helped lift sales throughout the quarter. Of course, Dollar Tree's fourth quarter will benefit from Christmas.
 
But the deep discount variety chain really looks at each month as a new holiday. It keeps its stores first-of-the-month ready to be prepared to capitalize on when its customers are flush with cash. That's partly why Dollar Tree is on track to reach one billion transactions for the first time ever.
 
4. Canada is a wide-open opportunity.
The Great White North represents a new opportunity for Dollar Tree to expand its primary pay-one-price concept. Although based upon the Canadian dollar (so all items are at $1.25 each), its value proposition is being equally well received. The dollar store leader believes Canada can accommodate as many as 1,000 stores, or five times more than the 205 it ended the third quarter with.
 
Dollar Tree Canada is the result of the $51 million Dollar Giant chain acquisition the company made in 2010. Carrying many of the same items it has in its U.S. stores, but also stocking exclusive items that it sources from Canada, it represents a more coherent opportunity than the potential Family Dollar merger.
 
It should focus instead on its operations north of the border. That would allow it to better compete against Dollarama (NASDAQOTH:DLMAF), a 900-store chain that sells goods for $3 Canadian or less.
 
The money tree in bloom 
Dollar Tree is the premiere pure play dollar store chain and sports the largest operating margins of any of its rivals. Adjusted margins improved to 11.2% from 10.8% last year, and from 10.5% in the second quarter. That's ahead of the 9.1% Dollar General recorded last quarter and the 1.5% from Family Dollar reported. 
 
It also beat both Wall Street earnings expectations and its own guidance. It generated profits of $0.69 per share on revenues of $2.1 billion allowing it to raises its full-year forecast. There's every reason to expect Dollar Tree's stock will respond in kind.
 

Follow Rich Duprey's coverage of all the most important news and developments in retail and consumer goods. He has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.