Market Mad House

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

Grocery Wars

Dollar Tree Grows Again

The times, as the old song reminds us, are changing. America’s two largest dime-store operators; Dollar Tree Stores (NASDAQ: DLTR) and Dollar General (NYSE: DG), are both larger than Sears.

Dollar Tree reported revenues of $21.21 billion and Dollar General reported revenues of $22.77 billion on 31 July 2017. Sears Holdings (NASDAQ: SHLD); once the gold standard of American retail, reported revenues of $19.75 billion on the same day. That is totally pathetic because Sears owns Kmart which was once the dominant force in American retail.

To add to the insult, Sears’ stock was trading at $7.62 a share on 15 September 2017. Dollar Tree’s was trading at $83.44 and Dollar General’s was trading at $77.58 on the same day.

Are Dollar Stores the Future of Discounting?

These numbers lend credence to the argument that dollar stores are the future of discounting. That thesis is bolstered by the rate of growth at the two dollar store operations.

Dollar Tree; which owns Family Dollar, reported revenues of $20.39 billion in July 2016 that grew to $21.21 billion in July 2017. Dollar General reported revenues of $21.01 billion in July 2016 that grew to $22.77 billion in July 2017.

Sales are up at the two bottom-feeding discounters, which can tell us why German discount grocers Aldi and Lidl are so enthusiastic about the American market. Those chains smell a big opportunity for growth in the underserved working class grocery and small-box retail market in the United States.

Are Dollar Tree and Dollar General Making Money?

Yet there is a big argument against such claims of growth, neither Dollar Tree nor Dollar General is making that much money. The free cash flow at the two chains is tiny and cash from operations is actually down at Dollar General.

Dollar Tree reported $83.10 million in free cash flow and a net income of just $927.07 million on July 30, 2017. Dollar General reported $105.24 million in free cash flow and a net income of $1.224 billion on the same day.

Dollar General reported $1.598 billion in cash from operations on July 30, 2017, in contrast to $1.60 billion for the same day last year. Dollar Tree reported $1.668 billion in cash from operations on July 31, 2017, which was an improvement for $1.507 billion for that day in 2016.

The sorry truth is that neither of these chains is making that much money despite their vast footprints. Dollar Tree supposedly owns 13,700 stores in the U.S. and Canada, and Dollar General claims to operate 14,000 locations.

One has to wonder whether these stores are generating enough cash to sustain their businesses. All it would take is one bad Christmas season to send either of these chains into the death spiral.

Can they compete with Amazon?

Such a season might be on the horizon with the aggressive push that both Amazon (NASDAQ: AMZN) and Walmart (NYSE: WMT) are making into the low-end retail field.

All either Amazon or Walmart would need to do to knock Dollar Tree or Dollar General off is to poach about 5% of their business. That seems likely with the aggressive growth of both companies.

Add Aldi and Lidl to the mix and down go the dollar stores. A major menace is that Amazon and Walmart are going after the middle-class customers that dime-store operators desperately need.

Both chains and their biggest grocery rival, Kroger (NYSE: KR) are making aggressive pushes into the same-delivery and pickup markets. Some of these efforts; such as Kroger’s Clicklist and Amazon’s DASH buttons are designed to make it very convenient to restore orders of household basics such as laundry detergent and dish soap through those retailers.

One has to wonder if there will come a day when only the old, poor and ignorant are shopping at dollar stores. If that happens will such chains survive or simply sink into retail hell.

The fast desertion of Sears and Kmart stores by shoppers shows how quickly that can happen. Sears same stores fell by 13.2% in second quarter 2017, while Kmart’s sales dropped by 9.4% during the same period.

Empty coolers at Family Dollar in Fairplay, Colorado, August 2017. Photo by DGJ.

Dollar Stores are a Lousy Investment

One thing is certain both Dollar Tree and Dollar General are lousy investments because they are overpriced. Neither chain has done anything justify the high stock prices reported on September 12, 2017.

My suggestion for investors is to stay away from Dollar Tree and Dollar General. There are better retailers out there which make more money and have a brighter future. It will be a miracle if either of these chains lasts beyond the year 2025.