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Dollar Tree - Company Analysis
Posted by: David Kerr (IP Logged)
Date: February 28, 2014 10:06AM
Dollar Tree Inc. (DLTR) is a major retailer of discount variety stores that offer a wide assortment of everyday merchandise including consumables, household goods, hardware and seasonal goods. As of February 2013, Dollar Tree held about 4,671 stores in the U.S. Over 90% of the company’s stores operate under either the “Dollar Tree” or “Dollar Bills” name and sell all items for $1 or less. The other stores sell most items for under $5.
The mix of merchandise that the company sells is actually broken down into three different types: Consumables, Variety Categories and Seasonal Merchandise. The Consumable merchandise consists of candy and food, health and beauty care, as well as household consumables such as paper, plastics and household chemicals. Select stores also offer frozen and refrigerated food in this category as well. The Variety Categories merchandise consists of toys, house wares, party supplies, gifts, greeting cards and other items. The Seasonal Category obviously includes Christmas, Easter and Halloween.
Dollar Tree is headquartered in Chesapeake, Va., and is the largest single-price-point retailer in North America. Dollar Tree also makes it on the list of Fortune 500 companies. The company is supported by a nationwide logistics network of nine distribution centers.
Even throughout the tough retail environment, Dollar Tree has managed to continue to open new stores in underserved markets while increasing its presence in existing markets via new store openings and expansions. From 2007 to 2012, the company increased its store count from 3,219 to 4,351. That’s a CAGR of 7.8%. The company also increased square footage by 7.7% during 2013. Dollar Tree has stated that they see an opportunity for at least 7,000 Dollar Tree stores in the U.S.
The major growth drivers for Dollar Tree are same-store sales and new store openings. With the hopes of increasing store traffic as well as the average transaction amount per customer, the company has been shifting its merchandise to include more consumables. This includes the addition of frozen and refrigerated goods in the recent years, which are available in over 2,549 stores. Dollar Tree plans to add roughly 600 new coolers and freezers to its stores in 2014.
As another way to encourage consumers to spend more per trip to the Dollar Tree stores, the company has also expanded the various types of accepted payments in recent years to include pin-based debit cards. This also includes Electronic Benefit Transfer (EBT) cards and food stamps in certain stores.
Dollar Tree currently rocks an operating margin of 12.55%, which is higher than any other company in the industry. They also have a return on assets of 22.17%, a return on equity of 49.02%, and a return on invested capital of 30.20%. Not bad. The company currently hold a 43% free cash flow growth over the last 10 years, and revenue per share has been on a steady uptrend over the last 10 years as well.
Bob Sasser, chief executive officer of Dollar Tree Inc., has been in charge since 2004. He is well tenured and experienced. He has a long and experienced track record with retail management. Surprisingly enough, it’s actually more difficult than one may think to find information about the corporate management of Dollar Tree stores, but the vast majority of the company’s leaders are very experienced and have been with the company for quite some time.
According to GuruFocus.com, the company currently has a Peter Lynch value of $67.41 by abiding by his famous metrics. Dollar Tree also has a current fair value of $76.30 according to the site's DCF Calculator that assumes a 20% growth rate in the next 10 years (an average of the last 10 years), and a discount rate of 12%. This leaves us with a margin of safety of 28%. Not bad.
Analysts are currently mixed on the forecast of Dollar Tree stores. Thompson Reuters has a positive outlook for the company, estimating a 12-month target price of $60.80, a 15.4% increase from current, according to 20 analysts covering the company. S&P Capital IQ only estimates an increase to $56 after a 12-month period.
Shares are roughly 10% off of their 52-week high, and it might be a good time to acquire shares in the company. It may also make sense to continue to monitor the company, especially if the price continues to decrease. The company offers some value to investors based on expected earnings growth and aggressive stock repurchase programs, but the company has recently been sued quite a bit and cannot increase its prices.
Disclosure: No current position held at the time of writing.
Disclaimer: The opinions and ideas in this article are for informational and educational purposes only. They are not a recommendation to buy or sell any stock at any given time. As always, it is imperative for each individual investor to do their own due diligence and perform their own research on any and all stocks before making an investment decision.
Stocks Discussed: DLTR,