By Neil Saunders
Building on the progress made in the first half, Dollar Tree has posted a robust set of third-quarter numbers — although the uplifts come off the back of a modest performance during the prior year. Both the Dollar Tree and Family Dollar fascia delivered growth, with same-store sales up by 5.0% and 1.5%, respectively.
Despite competition in the Canadian market, Dollar Tree has found success. Longer term the company is aiming for 1,000 stores north of the border, which does not seem unrealistic. Dollar Tree also sees the potential for many more U.S. stores (up to 10,000 Dollar Tree outlets and 15,000 Family Dollar shops).
The acceleration of sales is encouraging, not least because it has been delivered against the backdrop of a much more competitive market where many retailers are focusing more on price as a means of driving custom. Moving into the final quarter, it does not look as if price competition will ease up; if anything, it will likely intensify.
Despite this, we are broadly optimistic about dollar store formats. We believe the one-dimensional pricing structure, which makes it difficult to overspend, is a key point of difference and helps to cement the perception of value for money. This is borne out by our customer data which show that the value for money and price ratings for both Dollar Tree and Family Dollar strengthened slightly over the past six months.
Important though it is, low price is not the only factor that is helping to drive sales. Indeed, it is notable that many of the group’s core customers have seen their financial positions improve modestly over the course of this year, yet their loyalty and share of spending at both Dollar Tree and Family Dollar have largely remained the same or increased. One of the main reasons for this is that they like the convenience and localness of the stores in addition to the low prices they offer.
The convenience play is one that is often overlooked when it comes to the success of dollar formats. However, for many consumers – including more affluent shoppers — it is a critical differentiator. This is one of the reasons why Dollar Tree sees the potential for many more U.S. stores (up to 10,000 Dollar Tree outlets and 15,000 Family Dollar shops). In our view, while there is certainly more headroom for growth, we think the company’s projections are overly optimistic.
New stores in the U.S. are not the only strategy in the company’s playbook. The expansion into Canada and the growth of Dollar Tree Direct are both initiatives that are helping to drive growth.
Dollar Tree Direct is a small part of the business and given the low margin nature of most products its economics are questionable. However, we believe it is helping to increase the exposure of the Dollar Tree brand. We also think it gives Dollar Tree a stake in a channel that will, beneficial to profits or not, become more critical for the value players over the next five or so years.
The Canadian operation is also a relatively small part of the business. However, early results are encouraging, and despite competition in the Canadian market, Dollar Tree has found success. Longer term the company is aiming for 1,000 stores north of the border, which does not seem unrealistic.
While the sales line looks strong, the bottom line is also benefitting from cost savings and continued synergies from the integration of Family Dollar. With net income up by 39.8% this quarter and with strong cash flow, Dollar Tree is delivering good returns and, in our view, will continue to do so.
Neil Saunders is managing director of GlobalData Retail.