Although it was the smallest of the three national dollar store chains, Dollar Tree (NASDAQ:DLTR) made up for its size by applying competitive pressure to its rivals by selling merchandise in its network of 5,000 stores for $1 or less.
It was a successful strategy that allowed it to become the most profitable of the dollar store chains, and gave it the ability to challenge industry leader Dollar General (NYSE:DG) in a bid to acquire failing rival Family Dollar. It won that battle, and for good or ill, the five charts below give investors key insights into what makes this business tick now that it's a much bigger business.
1. Now it's within striking distance of industry leader, by revenue
Dollar Tree was always a distant third behind Dollar General when it came to generating sales, no matter how successful it was in its niche. But now with the contribution from Family Dollar more than doubling its top-line numbers, it is closer to being on the same level as its rival, providing a true competitive threat.
2. But it's now the biggest by number of stores
Even though Dollar Tree had to sell a few hundred stores to newly created Dollar Express to get regulatory approval for the acquisition of Family Dollar, it largely left its footprint intact because there was little overlap in the two stores or their concepts. It was one of the main selling points in helping it beat out Dollar General.
3. Yet now it's skewed toward $5 and up pricing
Where Dollar Tree was virtually a pure play when it came to being a dollar store -- all the items it sells are $1 or less, and its higher-priced Deal$chain made up just a negligible portion of its operations -- now with Family Dollar on board, the higher price points of its one-time rival accounts for the largest proportion of sales.
4. Which comes at the cost of gross margin
One of the problems with Dollar Tree's acquisition of Family Dollar was the merging of the lower-margin, faulty business operations of its rival with its more successful model. That impact became immediately apparent after the merger's closure as gross margins took a big hit, dropping from 34.2% in the year-ago second quarter to 28.4% this year. That faltering performance continued in the third quarter, with gross margins dropping to 28.3% from 34.6% last year.
5. And in operating margins, too
Where Dollar Tree had once been the strongest of the dollar store chains in terms of operating margins, bringing Family Dollar into the fold kneecapped those profits by cutting them by more than half.
A day late and a dollar short?
Dollar Tree has become an industry equal in terms of size but at the cost of profitability. Over the past six months, its stock has been relatively flat as the market apparently waits to see whether the integration of Family Dollar will work as well as Dollar Tree has suggested. But the illustrations above should give you a good working knowledge of what you need to know about this dollar store's operations.
Rich Duprey 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.