Market Mad House

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

Grocery Wars

Has Dollar Tree’s Growth Peaked?

The United States might have reached “peak dollar store;” Dollar Tree’s (NASDAQ: DLTR) revenues indicate that the chain may have reached the limits of growth.

During third quarter 2016 Dollar Tree’s revenues grew by just $60 million. That’s a big drop off from second quarter 2016 when those revenues grew by $2.04 billion, or first quarter when they grew by $2.91 billion in three months.

The revenue figures posted at ycharts indicate that the boom times might be over at Dollar Tree. The company reported revenues of $15.5 billion in January 2016, $18.41 billion in April 2016, $20.39 billion in June and $20.45 billion on October 31, 2016. Okay, a little under $5 billion in revenue growth in nine months is impressive, but $60 million in revenue growth in a quarter for a $20.45 billion retailer that supposedly operates 13,600 locations is anemic.

To be fair; Dollar Tree has been struggling with the expenses of absorbing the discount basket case known as Family Dollar, and cleaning up the mess left by that company’s incompetent management. Yet its’ growth should not have stalled so suddenly or completely.

Is the Dollar Store Boom Over?

The sudden halt to revenue growth at Dollar Tree should worry investors because it indicates that the dollar store boom might be over. Partial economic recovery and increased deep discounting at more traditional retailers like Kroger (NYSE: KR) and Walmart (NYSE: WMT) might be blocking or slowing growth.

Another threat to dollar stores is online discounting by Amazon (NASDAQ: AMZN) and Walmart and its subsidiary. Walmart in particular has demonstrated a capability for deep discounting online just as it is stepping up its delivery and logistics game. Walmart and Amazon are also using deep discounting of household staples like laundry detergent to lure in customers.

This definitely threatens Family Dollar’s business which is heavily rural. Much of Family Dollar’s base is families in small towns and outlying areas where there is no Walmart or Kroger or Walmart and Kroger are 50 miles away. Walmart has now figured out how to reach those areas by discounting online.

How Amazon and Threaten Dollar Tree

Amazon and Jet threaten Dollar Tree; which is more of an urban chain, by appealing to Millennial and Generation X customers. Strangely enough online retailer had previously driven dollar-store growth by eliminating the need of customers to go to big box stores. Now that phenomenon might be reversing as online retailers start eating into dollar stores’ profits.

One cause of this might be millennials having children which means tighter budgets, less impulse buying and more need of larger sizes. Such trends should benefit Walmart, but they also favor Amazon which provides a more convenient shopping experience for time-strapped soccer moms.

Dollar Tree’s leadership should definitely be concerned about this and scared to death of recent changes at Walmart. Walmart’s acquisition of Jet and hiring of its CEO; online discount guru Mark Lore, is a direct threat to dollar stores. Lore has a proven history of marketing to soccer moms, with and he’s a genius at online innovation. Among other things Lore is responsible for some of the mechanisms driving Amazon’s success including robotized fulfillment centers.

Is DLTR a Good Investment?

All this makes Dollar Tree’s future questionable but is it a good investment? After all this is a company that has experienced almost five billion dollars in revenue growth over the past year. It also reported a 3.43% profit margin on October 31, 2016.

I would say no because Dollar Tree is a retailer on very shaky ground. Despite all that revenue growth it reported a free cash flow of -$120.6 million on October 31, 2016. This is disturbing because Dollar Tree has reported a negative free cash flow every Halloween for three years straight including -$71 million in October 2014 and -$195.7 million in October 2015.

Despite that Dollar Tree is making some money it reported a net income of $803.5 million and $1.487 billion in cash from operations on October 31, 2016. The company also reported some float in the form of $737.8 million in cash and short-term investments and assets of $16.2 billion.

Are Dollar Tree’s Operations Sustainable?

These numbers reveal the biggest potential threat to Dollar Tree’s future. It can run out of cash and enter the death spiral at any time. That was what happened at Family Dollar where management suddenly found that operations were unsustainable.

Are Dollar Tree’s operations sustainable? Nobody knows, although with a footprint of 13,600 stores all it might take to start the death spiral is one bad Christmas season. Another threat would be a sudden increase in fuel prices which would mean less income for Dollar Tree’s working class customers and higher operating costs for the chain.

This makes Dollar Tree a very risky investment. To make matters worse the stock is overpriced and pays no dividend. The $89.39 a share it was fetching on December 9, 2016, was simply too high. My prediction is that Dollar Tree’s stock price is headed for a fall and soon.

Revenue growth has peaked at this retailer; making both its stock price and current business are unsustainable. Expect to see a major contraction in both share prices and footprints in the dollar store segment with DLTR leading the way. We’ve reached peak dollar store, so the collapse is about to begin.

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