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 Making Money?

There are some signs that Dollar Tree Inc. (NASDAQ: DLTR) is in trouble. I have noticed some problems at the company’s operations in Colorado – where I live.

Recently, I have noticed that a lot of products have vanished from Dollar Tree locations in my region. Significantly, the items disappearing have been higher quality specialty goods. For example, Dollar Tree’s selection of snack foods is a lot smaller now than it was last year.

More bothersome was a conversation I had with a manager at my local Family Dollar, a Dollar Tree subsidiary. The manager said he was quitting because his budget was being slashed by one-third.

A final problem that I have noticed is lack of staff and stocking at both Dollar Tree and Family Dollar locations. On numerous occasions I have noticed piles of unopened boxes all over the stores and empty shelves. That signifies a serious lack of staff.

All of this points to a company with cash flows. Staff and inventory are being cut in order to reduce costs. Such cuts drive customers away by reducing customer service and the selection of products.

Is Dollar Tree in Trouble?

The financials indicate that Dollar Tree is making money and growing, in spite of the apparent problems.

Dollar Tree reported revenues of $5.554 billion for 3rd Quarter 2018. Those revenues grew at a rate of 5.04% on a year to year basis from 2017.

More importantly, Dollar Tree delivered a gross profit of $1.699 billion, an operating income of $437.6 million and a net income of $160.5 million on May 5, 2018. Disturbingly, the Net Income fell by nearly 90% from the $1.04 billion reported on February 2, 2018.

Are Dollar Tree’s Losses growing?

The operating income fell by more than $300 million from $765.6 million in February. That indicates Dollar Tree lost several hundred million dollars in income in just one quarter.

Dollar Tree bulls will claim that the 2nd Quarter 2018 numbers include the 2017-2018 Christmas season. The problem with that argument is that the losses are greater than last year.

Back on January 28, 2017, Dollar Tree reported a net income of $321.8 million and an operating income of $586.50 million. Those numbers fell to $200.5 million for net income and $388.8 million for operating income on April 29, 2017.

It looks as if Dollar Tree’s losses are growing. The company is not losing money yet, but it looks like it is headed in that direction.

How Much Cash does Dollar Tree Have?

Like a lot of retailers, Dollar Tree suffers from a limited cash flow. It reported an operating cash flow of $387.6 million and a free cash flow of $206.5 million on May 5, 2018.

To make matters worse, Dollar Tree reported having just $475.2 million in in cash and equivalents on the same day. That will make many people wonder how Dollar Tree has been able to expand to 15,000 stores.

The likely answer is Dollar Tree borrowed the money. It reported $5.04 billion in debts and $8.471 billion in total liabilities on May 5, 2018. Dollar Tree’s breakneck expansion is being financed by a mountain of debt.

Dollar Tree is building a Mountain of Debt

What Dollar Tree is borrowing against is unclear because its cash and assets are limited. Dollar Tree’s assets were valued at just $15.827 billion on May 5, 2018. The company’s cash flow is limited and cash reserves are nonexistent.

Most likely, Dollar Tree is borrowing against its stock valuation. Dollar Tree shares were trading at $86.09 on July 16, 2018. That gave the company a Market Capitalization of $20.47 billion on the same day.

If my thesis is true, Dollar Tree would collapse if its stock lost any value. If Dollar Tree shares dropped below $60 or $50 the company might collapse because it would not be able to borrow money.

Dollar Tree’s Race with Death

“Those who cannot remember the past are condemned to repeat it” – George Santayana.

Dollar Tree appears to be in a race with the Death Spiral. The Death Spiral occurs when a retailer is unable to generate enough cash to pay its debts.

Dollar Tree is racing to open enough stores to generate enough revenue to cover pay its debt. The idea is that opening a massive footprint will generate enough revenue to cover the cost of expansion.

That did not work for Family Dollar, which collapsed in the wake of the Great Financial Meltdown of 2008. It probably will not work for Dollar Tree, which is likely to repeat the history of its subsidiary.

Dollar Tree is Likely to Collapse

One reason why Dollar Tree is likely to collapse is that its massive footprint is not valuable.

The 15,000 locations are cheap spaces in cruddy strip malls. Their contents consist of some shelving, a few refrigerators, and some outdated cash registers. There simply is not much value at Dollar Tree.

This contrasts sharply with retailers like Walmart (NYSE: WMT), Kroger (NYSE: KR), Target (NYSE: TGT), Occado (LON: OCDO), and Amazon (NASDAQ: AMZN). Each of those companies is making massive investments in technology and infrastructure.

Those investments include a massive expansion of delivery online services which threatens Dollar Tree. Delivery is a direct menace to Dollar Tree because it makes Walmart, Amazon, Kroger, etc. even more convenient.

Much of Dollar Tree’s appeal is convenience of quick in and out shopping in the neighborhood. Now Walmart, Target, and Amazon are even more convenient because they let consumers shop from the couch. The shopper no longer has to leave the house to get an order from those retailers.

How Instacart and Amazon can Kill Dollar Tree

Disturbingly, some of the prices on Amazon,, Shipt, and Instacart are already low enough to rival Dollar Tree. The only real barrier to direct competition with Dollar Tree is delivery fees.

If history is anything to go on delivery fees are likely to disappear or get rolled into a convenient monthly charge like Amazon Prime. That means delivery will be as cheaper, or cheaper than Dollar Tree at some point.

If that occurs, the only people shopping at Dollar Tree will be those too poor to afford delivery. Disturbingly, Amazon, Walmart and Instacart do not have to take a significant amount of Dollar Tree’s business to land a fatal low.

Dollar Tree’s margins are so low all they would have do is take 3% to 5% of its business to start the death spiral. Dollar Tree would have to significantly cut its footprint or reduce prices drastically to compete.

Investors should stay away from Dollar Tree because both the store and the company are headed for collapse. This stock is grossly overvalued.

There are better retail bargains out there such as Kroger. Kroger (NYSE: KR) stock was a better value than Dollar Tree because it was trading at $27.99 a share on July 16, 2018.

Dollar Tree is simply too risky to be a serious value investment in today’s retail warzone. Investors that want to make money should avoid Dollar Tree and its competitor Dollar General (NYSE: DG).