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5 Things Dollar Tree Inc. Management Wants You to Know

By Demitri Kalogeropoulos - Mar 3, 2015 at 9:43AM

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What executives had to say about the retailer's growth outlook, the Family Dollar acquisition, and more.

Discount retailer Dollar Tree (DLTR 1.60%) posted its fourth-quarter earnings results last week. They didn't disappoint. Revenue and profit both beat expectations as the company logged its 28th straight quarter of comparable-store sales growth. 

Subsequent to the announcement, CEO Bob Sasser and members of his executive team held a conference call with investors to discuss the earnings results. Here are five key points that management made in that discussion (all quotes are Sasser's).

A growing and loyal customer base

"We serve a very loyal and growing customer base. In fact in 2014, for the first time in company's history, we exceeded one billion customer transactions in a year." 

While most national retailers claim to have a large, loyal customer base, Sasser's statement is backed up by strong numbers. Dollar Tree's comps improved by 4.4% in 2014. That was an acceleration over 2013's comps growth of 2.4%. It also easily beat Wal-Mart's 0.5% gain and Target's 1.3% annual rise.

Best of all, Dollar Tree didn't have to slash prices to keep customers streaming into its stores: Profitability held to over 35% of sales, the highest in the discount retailing industry.

DLTR Gross Profit Margin (TTM) Chart

DLTR Gross Profit Margin (TTM) data by YCharts

Expanding the store footprint

"We have many opportunities to continue growing and improving our businesses through opening more stores, increasing the productivity of all stores and further developing our newest formats, new markets and new channels as growth vehicles." 

Dollar Tree's growth plans call for opening 400 new locations in 2015, for roughly 7% more square footage. That expansion pace is right in line with last year's when the retailer opened 391 stores and boosted square footage by 7.4%. Even with over 5,000 locations right now, management sees a long runway for growing its store footprint, in the U.S. and Canada.

Pushing into new categories

"Our customers are finding more value as we continue to expand assortments in pet supplies, hardware, health care, beauty and eye ware, as well as home and household products."  

Management is also aiming to boost sales by expanding the product selection at existing stores. That includes new categories like those listed above, in addition to refrigerated food. After adding freezers to 82 stores last quarter, Dollar Tree now sells refrigerated food in almost 4,000 of its shops. Yes, these items tend to be lower margin. But they have been a great investment in that they promote frequent visits by shoppers, and tend to boost overall sales per store.

Breaking the buck

"Our Deals format further extends our ability to serve more customers. By lifting the restriction of the $1 dollar price point, we have the opportunity to serve more customers with more categories."

Dollar Tree's management is optimistic about expanding into products above the $1 maximum price that's the foundation of its business model. Under the Deals brand, these locations account for a tiny portion of the store base: just 219 out of 5,400 shops.

But the average spending per customer is much higher there, and the format opens up more profitable product categories. As examples, management cited Christmas textiles, cleaning supplies, and phone and tablet accessories as popular high-priced products over the holiday quarter. 

The Family Dollar acquisition 

"The strategic rationale for this combination is powerful. We are combining two very large companies with more than 13,000 stores achieving almost $19 billion in sales and more than $2 billion in adjusted EBITDA."

Source: The Motley Fool.

Family Dollar (FDO.DL), which is on track to merge with Dollar Tree next month, reported weak operating results for its most recent quarter. Comps declined, as did profitability over the holidays. In fact, gross profit fell by a full percentage point to 33% of sales as Family Dollar cut prices to protect market share.

Still, Dollar Tree management is enthusiastic about the merger, arguing that there will be many opportunities for synergies. Investors should keep a close eye on Family Dollar's performance, as it might drag down results for the combined company going forward.

Demitrios Kalogeropoulos 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.

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