Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Dollar Store Wars Heat Up

The dollar store wars just took a really odd turn with Dollar Tree (NASDAQ: DLTR) and private equity operator Sycamore Partners suing each other over a discount chain that never opened.

The chain Dollar Express was apparently a sham designed to get around the Federal Trade Commission (FTC). When Dollar Tree bought its failed competitor Family Dollar in 2015 it agreed to sell 323 stores to Sycamore which would operate them as a new brand called Dollar Express. Dollar Express was an attempt to comply with FTC antitrust regulations.

How Dollar Tree Killed Dollar Express before it opened

The problem is that Dollar Express never really existed, The Charlotte Observer reported. The stores operated as Family Dollar until March 2017, when Sycamore laid off their staffs and sold everything to Dollar General (NYSE: DG).

That prompted Dollar Tree to sue claiming that Sycamore had not paid for goods and services sold through the Family Dollar stores it operated. Not be done Sycamore is suing Dollar Tree; alleging that it sabotaged Dollar Express by hiring and promoting unqualified workers and opening new Family new locations near Dollar Express stores.

Caught in the crossfire are around 3,000 people who will lose their jobs as a result of Dollar Express’s demise, The Charlotte Observer reported. Many of them will undoubtedly find work at Dollar General which is regarded as one of the worst employers in the nation.

Is Dollar Tree a Good Investment?

The fun and games will have many people wondering if Dollar Tree is a safe investment. The Dollar Express affair provides indications of shady dealings, questionable business practices and a lack of ethics at Dollar Tree’s corporate offices. Such shenanigans might make the company unstable and prone to collapse.

Despite that Dollar Tree’s revenues are still growing, they went from $18.41 billion in April 2016 to $20.92 billion in April 2017. That made for an increase of $2.51 billion but most of that growth can be attributed to the Family Dollar acquisition.

Since then the growth has slowed dramatically, Dollar Tree reported $20.39 billion in revenues in July 2016 and $20.92 billion in April 2017. That indicates we can expect slow but steady revenue growth at the company. The revenue growth shows that Dollar Tree is a good company capable of real growth despite the questionable behavior of some of its executives.

Is Dollar Tree Making Money?

Cynics such as value investors will ask the all-important question is Dollar Tree making money off that revenue growth? The answer is yes, but not as much as before.

The company’s net income has grown dramatically over the past year rising from $445.6 million in April 2016 to $864.1 million in April 2017. Yet the net income is down slightly this year, it peaked at $896.3 million in January 2017, but fell to $864.1 million three months later.

This might be a boost from holiday shopping, but if it is, it bucks retail industry trends. Target (NYSE: TGT) income fell during the holiday season, dropping from $3.346 billion in October 2016 to $2.737 billion in January 2017. Target’s income actually rose slightly in the last quarter rising to $2.787 billion in April 2017. Walmart’s (NYSE: WMT) net income fell steadily from $14.46 billion in October; to $13.64 billion in January, to $13.60 billion in April.

The most logical explanation of the income pattern is that Dollar Tree serves more traditional retail customers who are behind the curve on shopping behavior. That includes older, rural and working class customers that are less likely to shop online. It also raises the possibility that Dollar Tree is Amazon proof or at least Amazon resistant.

How Much Cash Does Dollar Tree Have?

Okay, so Dollar Tree is making money but how much of that money is it keeping? More than you might think because the company reported a free cash flow of $320.4 million on April 30, 2017, nearly triple the $1.35.1 million reported a year earlier.

Dollar Tree also reported $1.159 billion in cash and short-term investments (high for a retailer) for first quarter 2017. Cash from operations hit the highest number yet $1.793 billion, up from $963.10 million in April 2016. These figures show us that Dollar Tree’s profit margin of 3.79% is for real.

This makes Dollar Tree a cash rich company with a lot of value because of its footprint of 13,600 stores. That gave Dollar Tree assets of $15.99 billion on April 30, 2017, and an enterprise value of $22.97 billion the same day.

Dollar Tree is not a Value Investment

Despite that I do not consider Dollar Tree a value investment because its stock was overpriced at $75.50 a share on June 13, 2017. Despite the company’s profitability it simply is not worth that much. Beyond that Dollar Tree pays no dividend unlike Dollar General which is scheduled to pay a 26¢ dividend on July 7, 2017.

What this makes Dollar Tree is a potential value investment. Dollar Tree will become a value investment if its stock ever falls below $50 a share. Until that happens, stay away from this company.