The strategy of Dollar Tree is quite unique and consistent. Nearly all the merchandise sold in the stores can be bought for $1 or a little it more elsewhere. The company buys around 55%-60% of the merchandise domestically from closeouts and promotional merchandise and import the rest. The merchandise mix consists of consumable merchandise (candy, food, health and beauty care, paper, plastics, etc), variety merchandise (toys, gifts, party goods…) and seasonal goods (Easter, Halloween, Christmas). Recently, Dollar Tree has slightly increased towards the mix of consumable merchandise to boost up the traffic in its stores. So consumables at the end of fiscal year 2010 took nearly 50% of total merchandise, then variety categories of 46%, then seasonal accounted for only nearly 5%. Because of the fixed pricing policy, so Dollar Tree has to manage its cost very efficiently. It buys the products on an order-by-order basis and has no material long-term purchase contracts. No vendor took more than 10% of total merchandise purchased in any in the past 05 year’s history.
In terms of the growth strategy, Dollar Trees has experienced good growth regarding to number of stores as well as the total revenue. Over the past 05 years, the top line has increased at the annual compounded rate of more than 10%. The operating data of Dollar Tree for the period of 05 years is as follows:
|Number of stores||3219||3411||3591||3806||4101|
|Gross square footage||33.3||36.1||38.5||41.1||44.4|
|Selling square footage||26.3||28.4||30.3||32.3||35.1|
|Selling square footage annual growth (%)||14.3||8||6.7||6.6||8.8|
|Net sales annual growth (%)||16.9||6.9||9.5||12.6||12.4|
|Comparable stores net sales increase (%)||4.6||2.7||4.1||7.2||6.3|
|Net sales per selling square foot ($)||161||155||158||167||174|
|Net sales per store ($)||1.3||1.3||1.3||1.4||1.5|
Dollar Tree has consistently improved its operating performance. The net sales, number of stores, gross and selling square footage as well as the comparable stores has upward trend year on year. The economic recession doesn’t seem to affect Dollar Tree much as it kept increasing its comparable stores over time, whereas other retailers have been subject to the opposite trend.
Longer horizon of 10 years, the profitability as well as cash flow generation has been quite impressive for Dollar Tree. For the profitability, even with the fixed low price of $1 per item, it is not really the so low margin business, the gross margin and net margin stays around 35.3% and 5.7% respectively on average of the 10 years.
The return that business delivers is improving gradually over time and quite stable, with impressive figures. The ROE and ROA have been in double digits all the time for the last 10 years of its business.
It is not just the profitability, but the business is cash cow as well. The free cash flow and the operating cash flow has been on the rising trend on the 10 year operating history of Dollar Tree. The TTM OCF and FCF are at $624 million and $414 million. With the current level of debt at $265.5 million, the Debt/Cash flow ratio of the company is ample at the rate of 42%.
Chuck Akre, the value guy who got very concentrated portfolio has been buying more DLTR shares. He commented on the retailing industry: “There is a strongly held view that US consumer spending is going to continue to be constrained by employment issues, a lack of credit, higher taxes, and the need to save more and pay down debt. I don’t know anyone who hasn’t altered their spending patterns over the last two years.” People want to save more money, and that is why the discount retailer seems to be the place to go. Chuck mentioned that discount retailers were characterized by being “strong companies, with high levels of growth and low debt.”
A week ago, the company just announced the approval of Board of Directors for additional $1.5 billion share buybacks program. Since 2003, it has invested more than $1.9 billion to repurchase its own share, including more than $400 million in 2010 and nearly $350 million year to date.
For sure, for long-term investors, the historically proven record that Dollar Trees delivered in both operating performance as well as the share price has been very satisfactory and rewarding to its shareholders. Dollar Trees even with the sound to be high valuation of P/E 22 and P/CF of 16 can still be considered buy for long-term holding, as it got the potential for growth, being strong cash flow generator with ample financial health.