Here at the Fool, we know you've got a life. Between working while the sun shines and catching Z's when it doesn't, you may find it hard to keep up to speed on Wall Street events -- corporate "investor conferences," for instance.
These meetings ostensibly benefit investors, but the companies behind them rarely transcribe their proceedings and file them with the SEC. As a result, unless you can attend in person, you're often left out in the cold. That's where our "Fool on the Street" series comes in. We listen to the conferences, so you don't have to.
Without further ado ...
Today, we'll recap the news from Dollar Tree's
It's been a good six months since we sold this stock from the Motley Fool Inside Value portfolio. So, as a get-reacquainted exercise, let's begin with a quick recap of the business. Kleeberger described Dollar Tree as "the world's leading dollar price point retailer." Which means just what it sounds like: The firm sells stuff for a buck -- no more, and no less. What kind of stuff? Food and candy, health and beauty items, cleaning products, party favors -- you name it, and more than likely, Dollar Tree's got it. The firm has even been moving into selling frozen and refrigerated goods. Essentially, Dollar Tree is a modern, inflation-adjusted version of the old five-and-dime general store concept. Kleeberger describes his target customer as "a woman on the go. She's married with kids," with a household income of $40,000 or more.
The firm operates 3,300 stores in 48 states, and is growing rapidly in several ways. Kleeberger noted that the expansion in store count has recently averaged about 10% per year. Meanwhile, expansion in square footage has grown even faster, as management focuses on building larger new stores, and remodeling, expanding, and relocating to larger buildings some of its existing locations. It aims to slow the growth spurt only a bit this year, building an additional 225 Dollar Tree Stores and 25 of its new Deal$ brand stores, and relocating or remodeling another hundred of the latter, while closing about 36, presumably underperforming, stores -- so about 6% store-count growth.
I'm great with faces, but just can't place the name ...
This brings us to the most interesting part of Kleeberger's talk. Everything I've said so far seems to apply equally well to Dollar Tree competitors such as Dollar General
Kleeberger highlights several key points:
- "First and foremost is our price point. We're exclusively $1, with the exception of the Deal stores ..."
- The second key differentiator is product mix. Dollar Tree averages a 40/60, consumable/general merchandise mix, whereas its rivals tend to sell more low-margin consumables. ("Consumable" is corporate-speak for "food.") This helps Dollar Tree achieve operating margins superior to those of its $1-themed rivals, as well as those of smaller, similar target-market firms such as Fred's
(NASDAQ:FRED), and even industry goliath Wal-Mart (NYSE:WMT).
- Perhaps the most important point, though, is how Dollar Tree aims to maintain its lead over its main rivals. Kleeberger observes that while its competitors focus on locations where rents are low (read: the "country"), Dollar Tree prefers to live in the suburbs. And in fact, Dollar Tree is moving toward, rather than away from, the cities. Dollar Tree is willing to pay the higher rents there, in exchange for greater foot traffic, and access to higher-income shoppers.
Now that we've examined management's own bull thesis for Dollar Tree, I'd like to pick a few nits in Kleeberger's case. For example, he mentions Dollar Tree's $150 million to $200 million of (free) cash flow, as though it were one of the differentiators. It's not. In fact, both Dollar General and Family Dollar generate greater free cash flow, albeit on larger revenue bases. So the fact that Dollar Tree can "self-fund all of [its] store and infrastructure investments," while admirable, doesn't really set the firm apart from its rivals.
Second nit: Kleeberger seems to enjoy dissing his rivals for their consumable-oriented business models, and the low margins that result from this. But at the same time, he boasts of Dollar Tree's own expansion into the refrigerated and frozen foods biz, calling this "a big win for our business," "compelling," and crediting it with "driving traffic and repeat business." At one point in the presentation, he practically cackles with glee that as barbeque season arrives in America: "You can come to Dollar Tree and you can get a 4 oz. filet beef for just one dollar."
I'm not questioning Kleeberger's numbers (yet). But the logic does seem a bit off.
Who is looking askance at Dollar Tree's numbers? Fellow Fool Rich Duprey, that's who. Read his concerns over Dollar Tree's "dragging margins" and "higher sales of consumables" in the recent column "Dollar Tree Sprouts Growth."
Oh, and if you're curious as to why the Motley Fool Inside Value team sold Dollar Tree from its portfolio back in December, feel free to take a gander at our reasoning -- full access to the sell analysis is included when you take a free trial of the service.
Wal-Mart is a Motley Fool Inside Value recommendation.