Is Dollar Tree (DLTR) Doomed?

Dollar Tree (DLTR) demonstrates that it always pays for an investor to look well beyond the numbers and media hype.

For instance, headlines are hyping Dollar Tree’s (NASDAQ: DLTR) new headquarters in Chesapeake, Virginia, and 43 weeks of rising same-store sales.Yet, a visit to my local Family Dollar; a Dollar Tree subsidiary, reveals an unfolding retail catastrophe. 

Many of the shelves at my Family Dollar are empty, for example. In fact, basic items like garbage bags, milk, and dishwasher detergent are out of stock.

Furthermore, carts heaped with unopened boxes fill the aisles at the Fairplay, Colorado, Family Dollar. Thus, merchandise could be in-store but unavailable to customers.

Dollar Tree (DLTR) opens hundreds of new stores but it cannot stock the shelves

Dollar Tree (DLTR) is apparently incapable of basic retail functions, but it is opening hundreds of new stores.  

Empty shelves at my local Family Dollar

Specifically Dollar Tree is boasting of opening 127 new stores in 3rd Quarter 2018. The Hampton Roads Business Journal reports the company launched 87 Dollar Tree and 40 Family Dollar stores in 3rd Quarter.

I have to wonder how many of those stores are full of with empty shelves and unopened merchandise. Perhaps Dollar Tree could use the money spent on those new stores for more stocking personnel or a better inventory system, instead.

Additionally,Dollar Tree is opening a new 12-story headquarters and renovating or re-branding 194 stores. In particular, 164 Family Dollar stores became Dollar Tree outlets.

Will Dollar Tree (DLTR) Collapse?

Dollar Tree (DLTR) is so big that it could be unmanageable and likely to collapse. For example, the company operates 15,587 stores.

In detail, there are 6,923 Dollar Tree and 8,264 Family Dollar stores in operation, Randy Guiler claims. Tellingly, Guiler is Dollar Tree’s Vice President of Investor Relations.

I have to wonder how a company that cannot merchandise keep on the shelves can manage15,587 stores. Personally, I think Dollar Tree is so big it is unmanageable and will collapse.

Interestingly, that is exactly what happened to Family a few years ago. To elaborate, Family Dollar was an independent, publicly traded company that over-expanded ran out of money, and collapsed in 2011.

Now Dollar Tree seems to have the same affliction. Namely an arrogant and clueless management that thinks it can expand forever. In addition, Dollar Tree’s management is pretending there is no competition.

Is Dollar Tree (DLTR) Making Money?

On the other hand, Dollar Tree (DLTR) is making money. In particular, Dollar Tree generated a gross profit of $1.672 billion on revenues of $5.538 billion during4th Quarter 2018.

Those figures gave Dollar Tree an operating income of $387 million and a net income of $281 million for 4th Quarter. Hence, Dollar Tree is making a little money off its business.

Dollar Tree is not generating that much cash, for instance, it reports a free cash flow of $57.4 million for 4th Quarter 2018. Additionally, Dollar Tree records an operating cash flow of $282.10 million.

Dollar Tree (DLTR) is not sustainable

Simply put, I think Dollar Tree (DLTR) lacks the cash to sustain its operations. For instance, Dollar Tree reported $708.3 million in cash and equivalents on 3November 2018.

Thus Dollar Tree lacks the resources to sustain its operations or borrow a lot of money. Therefore, Dollar Tree could end up closing stores to cut expenses.

A likely scenario is that Guiler will brag about the new store openings one day and announce closings the next. I think this will happen because it looks like Dollar Tree is using the momentum from new stores to sustain its operations.

How Dollar Tree (DLTR) will die

To explain, new stores open and give Dollar Tree a sales boost. Then management touts that figure to investors to boost the stock price.

However, the sales boost ends when customers get sick and tired of going to Dollar Tree; or Family Dollar, and finding empty shelves. Hence, the only way Dollar Tree can attract customers is to open in areas where people are unfamiliar with it.

A related scam is the “re-branding” of Dollar Tree and Family Dollar stores.Instead of improving operations, Dollar Tree puts a new sign on the same-old building. Once inside, customers find the same employees, lousy service, and empty shelves.

Obviously, such shenanigans can only sustain the company for so long. At some point,customers will get sick and tired of wasting time at Family Dollar and Dollar Tree and stop coming.

Sorry Dollar Tree (DLTR), Amazon is coming for you

To make things worse, Amazon (NASDAQ: AMZN) is coming for Dollar Tree’s customers.

One of the popular bull arguments is that Dollar Tree (DLTR) is “Amazon proof;”because it sells to low-income people and operates convenient neighborhood locations. Now the Everything Store is testing a tiny Amazon Go concept store.

Amazon Go is a super-convenient cashier-less convenience store. Go threatens dollar stores because it is a convenient, small, shopping experience that could have lower operating costs. For instance, Go requires fewer employees because it lacks cash registers and cashiers.

Jeff Bezos is planning small-format Go stores that Amazon could open almost anywhere. For example, a 450-square-foot Amazon Go is operating on the Sixth Floor of a Macy’s (NYSE: M) in Downtown Seattle, The Seattle Times reports.

In contrast, existing Go stores are around 1,800 square-feet in size. Amazon is testing in the Macy’s because it leases office space in the building.

How  Amazon Go is coming to your Neighborhood

Hence, Amazon is developing Go footprints it could open almost anywhere. For instance,inside supermarkets, office buildings, factories, fulfillment centers,airports, train stations, big box stores, or even truck stops.

Amazon Go is a direct threat to Dollar Tree (DLTR) because it could sell everything Family Dollar carries. For instance, laundry detergent, dish soap, garbage bags, pet food, and clothes.

Additionally, Amazon Go could serve as a pickup location for merchandise ordered online. To demonstrate, if you go to Amazon Go and cannot find Tide; you could order it for pickup at the same location tomorrow.

How Amazon Go Threatens Dollar Tree (DLTR)

Moreover, Amazon could use the delivery ecosystem that brings packages to your door to supply Go stores.

For instance, UPS, FedEx, or Ship by Amazon could haul items from the fulfillment center to the Go stores. If the Go store needs Tide, the UPS man will drop off a few boxes the next day.

Thus, Amazon could open hundreds or thousands of Go locations almost anywhere without a new delivery infrastructure. Notably, Amazon is ordering 20,000 Mercedes-Benz Sprinter vans from Daimler (OTC: DAI) for Ship by Amazon.

Under these conditions, Amazon could quickly open hundreds or thousands of Go stores in communities across America. Plus, Amazon could keep those locations stocked without putting hundreds of semi-trucks on the road.

Dollar Tree (DLTR) cannot compete with Amazon Go

I have to wonder how a retailer as poorly run and as badly stocked as Dollar Tree could compete with Amazon Go. Logically, Dollar Tree could not compete with a well-run Amazon Go.

In addition, I think dollar stores will be the first retailers Amazon Go targets after convenience stores. Amazon has a history of first going after an industry’s “soft underbelly” before challenging the big players.

For instance, Bezos launched his retail revolution by selling books. Thus, strategically targeting one of America’s most old-fashioned, tradition-bound, and poorly managed industries: publishing.

Now Amazon is launching its first brick and mortar offensive against convenience stores a poorly run; low-margin segment of retail often ignored by the big players. I think once the Go succeeds in convenience Amazon will target dollar stores.

Watch out Dollar Tree (DLTR) Walmart, Kroger, and Target are coming for you too

To elaborate; like many convenience stores, dollar stores are understaffed, badly stocked, and poorly run. Thus both Dollar Tree and its arch-rival Dollar General (NYSE: DG) are sitting ducks for Amazon and other big retailers.

Nor is i tjust Amazon, dollar stores will have to contend with. Kroger (NYSE: KR)and Walgreens Boots-Alliance (NASDAQ: WBA) are experimenting with combination drug and grocery stores. In addition, Kroger, Walmart (NYSE: WMT), and Target(NYSE: TGT) are experimenting or discussing smaller format stores.

A likely scenario is that a successful Amazon Go will inspire, Kroger, Walmart, Target, Costco(NASDAQ: COST), and others to open similar stores. Hence, dozens of direct high-tech competitors to Dollar Tree could crop up overnight.

Why Investors Should Avoid Dollar Tree (DLTR)

Thus investors should avoid Dollar Tree (NASDAQ: DLTR). It is a poorly run retailer facing the potential of direct competition from Amazon and other retail giants.

Finally, Dollar Tree does not pay a dividend, so I think Mr. Market overpriced its shares at $85.76 a share on December 14, 2018. You should avoid Dollar Tree unless you like imploding retailers.