Dollar Tree Inc. – August 18, 2022

Amid unprecedented inflation and supply chain issues driving the cost of virtually all goods higher, it’s nice to know that there are still some stores that make hunting for a cheap bargain possible.

Dollar Tree is a leading operator of discount variety retail stores that operate under the brand names Dollar Tree, Family Dollar, and Dollar Tree Canada. With merchandise predominantly offered at the fixed price point of $1.25, Dollar Tree serves a broad range of income customers in suburban locations, aiming to “wow” them with a compelling, fun, and high-value assortment of products. While Family Dollar operates general discount stores providing customers with a selection of competitively-priced merchandise in convenient neighborhood locations.

Focusing on convenience and value as key factors in serving and growing a base of loyal customers, Dollar Tree has grown to over 16,000 retail stores across 48 states and five Canadian provinces.

With a view that the market can support more than 10,000 Dollar Tree stores and 15,000 Family Dollar stores across the U.S., and 1,000 Dollar Tree stores in Canada, the company is in the midst of an aggressive expansion program to open new stores in underserved markets and strategically increase its presence in existing markets.

Furthermore, strategic initiatives including Dollar Tree Plus, Family Dollar H2, and Combination Stores format upgrades are continuing to revitalize the group’s assortment of products in every store.

Despite only coming together in 2015, both Dollar Tree and Family Dollar have a rich history and have been thriving businesses for almost 70 years.

In 1953, K.R. Perry opened a Ben Franklin variety store in Virginia, which he later renamed K&K 5&10. Then in the 1970s, Perry teamed up with Macon Brock and Doug Perry to launch the mall concept-based K&K Toys which grew to over 130 stores on the East coast. The K&K 5&10 store continued to exist and served as the foundation for what would become Dollar Tree. In the ’80s, the Dollar Tree team started Only $1.00 with 5 stores across 3 states. These initially continued alongside K&K Toys stores, before the toy store assets were sold in the ’90s to further advance the expansion of dollar stores. A name change to Dollar Tree Stores in 1994, preceded the company going public on the NASDAQ a year later. While acquisitions of Dollar Bill$, Inc., 98-Cent Clearance Centers, Only $One Stores, Dollar Express, Greenbacks Inc, and 138 Deal$ stores further expanded the company’s footprint, earning it a place on the Fortune 500 list in 2008 as sales reached in the billions.

While in 1959, 21-year-old entrepreneur Leon Levine, who believed he could offer his customers a variety of high-quality, good-value merchandise for under $2, opened the first Family Dollar store in North Carolina. He created a general floor plan that allowed shoppers to easily find their favorite products in any Family Dollar store, which allowed store managers to focus on providing excellent customer service. By 1970, Family Dollar also went public, and a year later, the company opened its 100th store. Expansion skyrocketed and annual sales hit over $100 million. Popularity as a major regional discount store chain continued to accelerate and, in the decades following, Family Dollar also became a Fortune 500 company with sales in the billions by the 2000s.

In 2010, Dollar Tree opened its 4,000th store and expanded into Canada with the purchase of 86 Dollar Giant Stores. Five years later, Dollar Tree acquired Family Dollar, putting it on a path to exceed $25 billion in sales by 2020.

Dollar Tree’s president and chief executive officer, Mike Witynski, has more than 40 years of knowledge and experience in the retail industry and since 2020, has overseen the company’s strategic operations, supply chain, merchandising, and marketing.

In the decade prior to his current role, Witynski held various senior positions within the company including enterprise president, chief operating officer, as well as senior vice president of retail stores. While before Dollar Tree, he had a 29-year career as an executive leader in the grocery industry, including serving at the $4 billion regional chain, SUPERVALU.

With stores in thousands of communities across the U.S. and Canada, Dollar Tree is known for providing unparalleled value and a “thrill-of-the-hunt” shopping experience. Stores aim to offer an ever-changing assortment of products in categories such as seasonal celebrations, stationery, crafts, snacks, party and cleaning supplies, among many others. All from trusted national and regional brands.

Many of the items Dollar Tree carries sell for more elsewhere, with the company committed to making it possible for customers to stretch their dollars to get the products they need with extreme value.

Following a positive customer reaction and significant success, it began adding Combo Stores to bring the best of Dollar Tree and Family Dollar formats together under one roof, and were designed specifically for small towns and rural communities with populations of 3,000 to 4,000 residents.

While Dollar Tree Plus stores expanded the company’s offering by providing an assortment of value-priced $1, $3, and $5 products.

In Family Dollar stores, the focus is on everyday low prices, convenient neighborhood locations, and a compelling assortment of everyday merchandise for the whole family, from toys and beauty supplies to home décor, and grocery items. The company aims to be an essential and dependable resource for customers, as Family Dollar primarily serves a lower-than-average-income customer in urban and rural locations.

Relative to U.S. operations, Dollar Tree’s revenue and assets in Canada are not material, however, the company currently serves almost 240 stores across five provinces, where they principally sell items CAD$1.25 or less.

To continue to offer customers such a wide range of products in the face of extraordinary inflation, during the third quarter of 2021, Dollar Tree announced a new initiative to increase the price point on a majority of its $1.00 merchandise to a new $1.25 price point across stores. The rollout represented the company’s first price change in over 36 years.

With customer feedback focused heavily on a desire for a broader product assortment when they come to shop, Dollar Tree felt the new pricing strategy will enable it to continue to introduce new products and expand its merchandise range in stores, while still maintaining great value for customers.

In addition, the company continues to implement its Dollar Tree Plus initiative, adding a further range of discretionary categories priced at $3 and $5 price points. Currently, Dollar Tree Plus sections have been added to over 1,000 stores, with more planned in the coming years.

Beginning in 2022, Dollar Tree entered into a partnership with Instacart, allowing customers to shop online and receive same-day delivery from nearly 7,000 Dollar Tree stores. Customers can ship their orders for free to their local store for pick up, or pay to ship orders directly to their home or business. In addition to shopping online, customers can also find ideas and inspiration for using Dollar Tree products from recipes and craft ideas to home décor DIYs, and party tips, among other things.

Adding to its already enormous 16,077 store footprint, for the fiscal 2022 year alone, the company plans to open 190 Dollar Tree stores and 400 Family Dollar stores, with most in the new Combo format, while renovating a further 800 Family Dollar stores. Further expansion in the thousands is anticipated by the end of fiscal 2024.

Dollar Tree maintains an effective purchasing strategy, largely due to substantial buying power and flexibility in making sourcing decisions. A comprehensive merchandise system not only provides valuable sales information to assist buyers and improve product allocations in stores, but also targets inventory levels in distribution centers and stores in order to plan for capacity and labor needs.

Furthermore, a strong and efficient distribution network allows Dollar Tree to grow and maintain a low-cost operating structure. The company currently operates 26 distribution centers in the U.S., while new distribution sites are strategically located to reduce stem miles, maintain flexibility and improve efficiency in store service areas. A significant expansion of a Florida distribution center is expected to be complete in 2024 which will include more modern automation.

After delivering record net sales of $26.3 billion in the 2021 fiscal year, Dollar Tree continued its strong run rate momentum into 2022, recording $6.90 billion in net sales up 6.5% from the prior year’s first quarter. The result came off the back of successfully completing its conversion to the $1.25 price point, which contributed to both sales and margin improvements, with gross profit increasing 19.2% to $2.3 billion.

While selling, general and administrative expenses increased marginally as a percentage of total revenue to 23.3% primarily due to payroll costs, the closure of a West Memphis distribution center, and the reconstitution of the board of directors, net income also ultimately increased by 43.2% to $536.4 million.

Looking ahead, net sales for the 2022 year are now expected to range from $27.8 billion to $28.1 billion in line with consensus estimates, representing year-on-year growth of close to 7%. While earnings per share estimates are forecasted to increase more than 40% to $8.19 per share, up from $5.80 in 2021.

Dollar Tree’s segment of the retail industry is fragmented and highly competitive with challengers coming from single- and multi-price dollar stores, mass merchandisers, online and discount retailers, drug, convenience and grocery stores, along with a wide variety of other retailers. In addition, several traditional retail competitors have sections within their stores devoted to “one dollar” price point merchandise. However, Dollar Tree believes it differentiates itself from other retailers by providing high-value, high-quality, low-cost merchandise in attractively-designed stores that are conveniently located.

With widespread economic pressures across the globe, it is expected that the segment will continue to be highly sensitive with respect to price, store location, merchandise quality, assortment and presentation, and customer service.

As consumers feel the pressure of price increases, particularly on staples like groceries, discounted retailers like Dollar Tree stand to benefit from changing spending habits as shoppers forego their preferred retailers. With a comprehensive expansion plan, coupled with both top and bottom-line results trending in the right direction, there is a lot to like about this defensive play.