Market Mad House

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

Grocery Wars

Is Dollar Tree Doomed?

Observers of the small-box discount scene are asking is Dollar Tree doomed. Recently, Dollar Tree Inc. (NASDAQ: DLTR) has been taking some drastic actions.

First, rumor has it the company is converting stores of its Family Dollar subsidiary into Family Dollar/Dollar Tree hybrids in states like Colorado. Second, Dollar Tree could close up to 390 Family Dollar stores and convert another 200 Family Dollar stores  into Dollar Tree locations, USA Today reports.

Third, Dollar Tree could abandon its legendary everything for $1 sales model and sell higher-priced items, USA Today claims. Consequently, Business Insider reveals Dollar Tree is adding a range of higher-priced merchandise management calls Dollar Tree Plus!

Fourth, Dollar Tree will sell alcohol at 1,000 of its stores, Business Insider claims. Business Insider gives no details of the alcohol Dollar Tree could sell.

Is Dollar Tree Desperate?

Retailers do not make such drastic changes to their business models unless they are desperate. Therefore, I think Dollar Tree is a desperate retailer.

Dollar Tree is desperate because Amazon (NASDAQ: AMZN) is eating into its business. For instance, Dollar Tree is planning to sell something Amazon cannot alcohol. The hope is that adding cheap booze or beer could lure more foot traffic into Dollar Tree.

Moreover, I guess Dollar Tree could not sell most beer or liquor for $1. Additionally, Dollar Tree claims foot traffic at stores with more food and bigger freezer sections grew by 10%. Thus, Dollar Tree management thinks they can grow business by selling more food.

What is Dollar Tree Afraid of, Amazon?

I suspect Dollar Tree is afraid of two growing retailers; Amazon and Aldi. Amazon threatens Dollar Tree is making a strong push into the consumer essentials market.

For example, Amazon is pushing products like laundry detergent and coffee through its Dash gimmick. To explain, Dash lets you order items like Tide through Amazon at the push of a button or an app. Amenities like Dash and Amazon Prime’s free shipping make Amazon more convenient than Dollar Tree.

Part of Dollar Tree’s appeal is its convenience. Dollar Tree is small, and in the neighborhood so you can run in and grab that thing you missed on your last Walmart (NYSE: WMT) or Costco (NASDAQ: COST) run. Amazon lets you order that forgotten item without leaving home which threatens Dollar Tree’s whole reason for existence.

A related problem is that Jeff Bezos; like Walmart’s management, will sacrifice Amazon’s profits for long-term growth. Meanwhile, traditional retailers like Dollar Tree plan and invest for short-term growth and profit in the form of next quarter’s foot-traffic and sales.

Therefore, both Walmart and Amazon will sell certain items at a loss to attract customers.  However, Dollar Tree has to make money on everything it sells. Thus, competing with Amazon and Walmart could be impossible for Dollar Tree.

Is Aldi a Threat to Dollar Tree?

The privately-held super-cheap small-box discount grocer Aldi is a more complicated menace. Like Dollar Tree, Aldi sells a limited selection of merchandise at low prices in a no-frills environment.

Aldi, however, concentrates on groceries while Dollar Tree is a general retailer, specializing in dry goods. Plus, Aldi concentrates on selling high-quality merchandise at low prices.

Family Dollar in Fairlay, Colorado photo by me

The German-based Aldi is expanding aggressively with plans to add 400 new stores in the United States soon, Market Mad House reports. Aldi now operates over 1,800 stores in the United States and plans more expansion.  

Aldi is just as cheap and convenient as Dollar Tree and it operates in many of the same markets. Importantly, Aldi sells alcohol, which gives it an edge over Dollar Tree in some markets. Hence, Dollar Tree is entering the beer, wine, and spirits business.

How Dollar Tree can Profit from Amazon

Strangely, there is a way Dollar Tree can cash in on Amazon. Family Dollar sells Amazon and other discounts gift cards for cash.

Consequently, people with no credit cards or bank accounts can shop at Amazon with such cards. For instance, Dollar Tree sells American Express (NYSE: AXP) gift cards Amazon will accept. Moreover, I have seen Amazon, MasterCard (NYSE: MA), and Visa (NYSE: V) gift card for sale at Family Dollar.

Dollar Tree can make money from such cards because 25% of American households were unbanked or under-banked in 2017, the Federal Deposit Insurance Corporation (FDIC) estimates. To clarify, unbanked means a household has no bank account.

Moreover, unbanked means a household has limited banking options . For instance, a family could have a checking account but no credit cards or debit cards.

However, you need a credit, debit, or gift card to shop at Amazon. If those households want to shop at Amazon, they can buy a gift card at Family Dollar or Dollar Tree. Notably, Amazon gift cards cost $15, $25, $50, or $100. Hence, one reason Dollar Tree is abandoning “everything for a dollar” is to sell gift cards.

How Dollar Tree plans to profit from the poor

Amazon is just one popular digital service selling gift cards. Other popular digital products and services you can buy a gift card for include Netflix (NASDAQ: NFLX), Uber (NYSE: UBER), Disney (NYSE: DIS), STEAM, Hulu, video games, Spotify (NYSE: SPOT), and eBay (NASDAQ: EBAY).

If the poor want entertainment in modern America; they need gift cards, and Dollar Tree will sell them. Hence, Dollar Tree can at least make some money from the death of television, the Fortenite craze, and Amazon’s retail apocalypse. Moreover, gift cards are an easy product to sell.

Besides gift cards, Dollar Tree sells wireless service which is now an essential for many Americans. Notably, just 6.5% of American households only used a landline telephone in 2017, The Verge estimates. In addition, 50.8% of American households were wireless only in 2017.

In particular, Dollar Tree can sell streaming video, telephone service, and Amazon access to the unbanked. Plus, Gift Cards are an easy item to sell that requires little floor space and no special storage. Additionally, outside contractors can stock and service gift cards which could reduce Dollar Tree’s operating costs.

Dollar Tree’s Management is Smarter than You Think

Thus, Dollar Tree can survive by selling items Amazon cannot like tobacco and alcohol, and gift cards. The business is hardly glamorous and ethically dubious but there is a market.

If the FDIC’s estimate that 25% of American households are unbanked, or underbanked. Dollar Tree could have a market of 31.9 million households for its gift cards and wireless services.  

To elaborate, Statista estimates there were 127.59 million households in America in 2018. I calculate that 25% of 127.59 million is roughly 31.9 million.

Given these numbers, I think Dollar Tree’s management is investing for the long-haul. Thus, Dollar Tree’s management could be smarter than critics think. The company could have found a way to survive and make money in a drastically changing retail environment.

Is Dollar Tree Making Money?

Current financial numbers show some of Dollar Tree’s changes are paying off. For instance, Dollar Tree Inc. (NASDAQ: DLTR) reported revenues of $5.809 billion and a revenue growth rate of 4.59% on 4 May 2019.

Plus, Dollar Tree reported a gross profit of $1.727 billion, an operating income of $386 million, and a net income of $268 million on the same day. Consequently, Dollar Tree is making money and stopped the losses reported on February 2, 2019.

Dramatically, Dollar Tree reported an operating loss of -$2.147 billion, a net loss of -$2.307 billion, and a shrinking revenue growth rate of -2.44% on 2 February 2019. Thus Dollar Tree can make money with its current business model but for how much longer.

Dollar Tree is Generating Less Cash

Interestingly, Dollar Tree’s cash flow is falling as it income rises. To explain, Dollar Tree reported a free cash flow of $405.20 million and an operating cash of $614.10 million on 4 May 2019. However, Dollar Tree reported an operating cash flow $715.10 million and a free cash flow of $517.80 million on 2 February 2019.

Effectively, Dollar Tree is generating less cash from its operations. Additionally, Dollar Tree reported negative cash flows in investing (-$192.40 million), financing (-$117.50 million), and capital expenditure (-$205.90 million) on 4 May 2019.

Finally, Dollar Tree has very little money in the bank. Notably, Dollar Tree reported $750.50 million in cash and equivalents on May 4, 2019. Such a tiny flow cash reserve could be fatal when Amazon has incredible amounts of cash to play with. In detail, the Everything Store had $41.463 billion in cash and short-term investments on June 30, 2019.

What is Dollar Tree’s Future?

Under these circumstances, the shape of Dollar Tree’s future is obvious. That future will involve gift cards, alcohol, tobacco, and hybrid store arrangements.

First, Dollar Tree must concentrate on products other retailers shun like alcohol and tobacco. The Vape or e-cigarette business, in particular is booming.

Specifically, Bloomberg reports Juul Labs Inc., expects revenues of $3.4 billion for 2019. Triple its 2018 revenues of $1.122 billion. Plus Juul posted revenues of $424 million for 4th Quarter 2018. Hence, adding Vape products could be a smart move for Dollar Tree.

Second, Dollar Tree needs to become the place to buy gift and wireless cards for cash. Statisa values 2018 US gift sales at $160 billion.

Dollar Tree Needs to Partner with other retailers

Third, Dollar Tree needs to explore the possibility of sharing its store space with other retailers. Interestingly, Kohl’s (NYSE: KSS), and Aldi are opening joint stores in Midwest, reports.  

An Aldi/Dollar Tree combination, or a Kohl’s/Dollar Tree hybrid are logical extensions of this concept. Another smart partnership for Dollar Tree could the German discount grocer Lidl which is expanding its US operations.

Other interesting partnerships for Dollar Tree could be Amazon, Kroger (NYSE: KR), and Walgreen’s (NASDAQ: WBA). Kohl’s is accepting Amazon returns, and Amazon is expanding its brick and mortar footprint with Amazon Go and other concepts. Meanwhile, Kroger and Walgreen’s are experimenting with joint-stores in Kentucky.

Concepts, Dollar Tree needs to explore are accepting Amazon returns, a combination Amazon Go and Dollar Tree, Kroger grocery pickup at Dollar Tee, and Walgreens Pharmacies in Dollar Tree stores.

Is Dollar Tree a Value Investment?

Mr. Market overpriced Dollar Tree at $92.38 on 7 August 2019. Currently, I think Dollar Tree is a lousy stock because its overpriced and pays no dividend.

Investors need to stay away from Dollar Tree because this retailer is doing little for them. Moreover, I think there are better Dividend-paying retail stocks, including Kroger and Walmart, out there.

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