Dollar Tree…Making Dollars Out Of $0.15

Dollar Tree is the largest dollar chain with over 14, 000 stores.  Dollar Tree has been successful to this point because of their perceived value.  Essentially you pay for what you get and the items are sold in a smaller unit size.  But they have done some clever things as well.  They have kept the items they sell to a minimum, so they have a high inventory turns and stores do required a whole lot footprint and they sell a ton of private label items, which helps their margins.

To compete with the likes of Walmart, they purchased Family Dollar in 2015 to expand their customer base. 

Dollar Tree caters to people who live in the suburbs, while Family Dollar caters to people who live in urban.   However, Family Dollar really never did their homework prior to the purchase.   Family Dollar customers have a lower income than their suburban counterparts and less likely to make impulse buys because of their budget. 

That one major difference between the two customer base has hurt the earnings ever since the acquisition.  For example, when Dollar tree announced earnings yesterday, Family Dollar reported a 1.4% increase in sales at stores opened at least a year vs Dollar Tree 3.2% increase.  Needless to say, Revenue declined by -2.4%, gross profits fell and guidance for the next quarter and full year was below Wall Street estimates.

So why did the stock price rise 5%.

Dollar Tree finally recognized the bad business choice they made in 2015.  On the earnings report they said they closed 84 Family Dollar stores in the fourth quarter, will close an addition 390 Family Dollar stores in 2019 and will rebrand another 1000 Family Dollar stores to Dollar Tree stores.

I personally think the company needs to distance themselves a bit more from Family Dollar before considering the stock price a buy.  Nevertheless, the monthly chart continues to make higher highs and higher lows.

After price broke the down trendline, price formed a bull flag before breaking out this week. The chart suggests price will pull back before moving higher to the $114 level.

This post is my personal opinion. I’m not a financial advisor, this isn’t financial advise. Do your own research before making investment decisions.

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