Is Dollar Tree Making Money?

Dollar Tree Stores (NASDAQ: DLTR) seems to be both overpriced and in big trouble these days. Shares of the dollar-store operator were trading at $100.94 on November 28, 2017, yet the company reported a negative free cash flow of -$260.40 million on Halloween Day 2017.

The free cash flow might not be bad because Dollar Tree reported a free cash flow of -$120.60 million in October 2016 that shot up to $903.90 million in January 2017. That seems to indicate that this company is hoping for a really great holiday season to pay the bills.

Such a business plan might not work these days because the number of retailers including Target (NYSE: TGT) and Walmart (NYSE: WMT) reported declining incomes over the course of last year’s holiday season.  The old Christmas rush is not what it used to be, except at Dollar Tree.

Dollar Tree reported a net income of $803.50 million in October 2016 that rose to $896.30 million in January 2017. Income-wise Dollar Tree has had a pretty good year, the income increased by nearly $100 million rising $896.30 million in January to $996 million in October.

Dollar Tree May Not have the Resources to Compete and Survive

Even with a good holiday season, Dollar Tree may lack the resources to survive or even remain competitive. It reported revenues of just $21.52 billion in October 2017.

Those revenues from $20.72 billion in January to $21.52 billion in October 2017, but they’re still low when compared with some of Dollar Tree’s biggest competitors. Target reported revenues of $68.80 billion in October 2017, Costco Wholesale (NASDAQ: COST) reported $129.02 billion in revenues on August 31, 2017, Kroger (NYSE: KR) reported revenues of $118.05 billion on 31 July 2017, Amazon (NASDAQ: AMZN) had revenues of $161.15 billion on September 30, 2017, and Walmart reported revenues of $495.01 billion on Halloween Day 2017.

From a revenue perspective, Dollar Tree is a 15-pound monkey trying to survive in a jungle full of 900-pound gorillas. The big boys have the money and resources to squash it anytime they want to.

Can Dollar Tree Remain Competitive in Today’s Retail Environment?

This puts companies like Walmart and Kroger in position to practically give away products in an effort to undercut Dollar Tree’s prices. City Market; a Colorado Kroger brand, regularly sells tomatoes at 50¢ a can – half Dollar Tree’s $1 price for example.

Realistically, Dollar Tree cannot afford to compete with the giants but it has to. Dollar Tree’s Family Dollar subsidiary tries to avoid direct competition by operating in towns too small for Walmart or Kroger. That strategy fails in today’s market because Amazon and Walmart can compete directly with Family Dollar almost anywhere with the help of UPS, FedEx, and the U.S. Postal Service.

A truly bizarre aspect of today’s battle for retail survival is that Family Dollar sells some of the tools of its own destruction; Amazon gift cards, in its’ stores. That alone exposes the predicament that Dollar Tree is in.

Dollar Tree’s Disturbing Lack of Resources

The October 31, 2017, financial numbers posted at ycharts expose a disturbing lack of resources at Dollar Tree.

Dollar Tree had just $400.10 million in cash and short-term investments and $15.73 billion in assets on October 31, 2017. Yet it reported liabilities of $9.614 billion and a long-term debt of $5.723 billion on the same day.

 

There was also $1.611 billion in cash from operations on October 31, 2017, that number was up from $1.487 billion in October 2016, but down from $1.793 billion in April 2017. It looks as if Dollar Tree is running less cash through its till.

An obvious threat to Dollar Tree is the death spiral which occurs when a retailer lacks the cash to pay its bills. The death spiral often starts when retailers start borrowing money to cover expenses or buy merchandise for the holidays.

Is Dollar Tree Facing the Death Spiral?

Unfortunately, Dollar Tree is susceptible to another cause of the death spiral over expansion. The company added 169 new stores and expanded or remodeled 23 more during third quarter 2017, Retail Dive reported. That was in addition to a footprint that’s been estimated at 13,400 stores.

The obvious conclusion is that Dollar Tree’s operating costs are high and its margins are low. This makes it super vulnerable to deep-discounting by larger competitors. All Kroger or Aldi has to do is to take 3% or 4% of a Dollar Tree or Family Dollar location’s business to make it unviable.

Nor is that just Dollar Tree that is in potential trouble, the privately held 99¢ Only Stores; a legendary Southern California chain with a similar business model appears on Retail Dive’s list of brands that might go bankrupt in 2018. Even though sales increased by 6.9% at 99¢-Only in third quarter 2017, S&P downgraded the company’s debt in September.

Disturbingly the net store sales increase at Dollar Tree in the third quarter was 6.3% lower than that at 99¢ Only, Business Insider reported. Same-store sales at Dollar Tree branded stores grew by 5.2%, while store-sales throughout the chain grew by just 3.3%.

Stay Away from Dollar Tree Stock

Dollar Tree might be one or two quarters away from the death spiral or a major reorganization. Therefore staying away from its overpriced stock would be a smart move.

Dollar Tree shareholders receive no dividend, but they were rewarded with a 17.77% return on equity on 31 October 2017. Even that payout makes Dollar Tree a terrible deal because there are better retail stocks that pay dividends out there such as Walmart.

If you own Dollar Tree shares sell them, this company is headed for a fall and soon. Stay away from Dollar Tree stock unless you are looking for something to short. This company is on shaky ground and its stock is overpriced.