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I used to be a huge fan of Dollar Tree (NASDAQ: DLTR). It would always win dollar-store smackdowns because it ran the most efficient operation year after year, with revenue per employee, margins, gross income and net income always wiping out the competition.
I did not like Dollar Tree’s purchase of Family Dollar, because it felt like Dollar Tree was chasing after a sub-par operation and overpaying for it. Let’s look at Dollar Tree earnings for the fourth quarter and full year and assess what’s going on.
Dollar Tree Earnings Reflect Acquisition
Dollar Tree sales increased 116.7% to $5.4 billion from $2.5 billion in the fourth quarter, but that’s obviously because the Family Dollar stores have been added. The problem is that same-store sales only popped up 1.7%, versus last year’s 5.6%. That latter number is fabulous in this business, so the fact that it fell off was a red flag to be investigated
Dollar Tree’s gross profit for the quarter increased by 79.9%, to $1.6 billion, again due to the acquisition. So instead, we look at gross margin to see how efficient those sales were. They are lousy. Dollar Tree’s gross margin fell to 30.8% from 37.1%. Remember how I said that margins at stand-alone Dollar Tree were so much better?
Dollar Tree’s net income in the fourth quarter increased $22.4 million to $229 million.
Flag the Same-Store Sales
Now, for the full year, the Dollar Tree earnings report said the company’s net sales increased $6.89 billion, or 80%, to $15.49 billion. Again, however, for the full year, same-store sales increased only 2.5% against a 4.4% increase the previous year.
Dollar Tree’s gross profit for the year increased $1.62 billion, or 54% to $4.7 billion. Again, gross margin got clobbered from 35.3% to 30.1%. Net income decreased by $317 million.
What’s going on ?
Certainly, digesting the acquisition is having some effect on Dollar Tree’s margins. That’s fine and to be expected. Yet the behavior of the consumer is what is affecting the company. Sure, the great news is that gas prices have come way down. That obviously means that consumers have more money to spend. One would initially think that should boost sales.
A Bigger Problem
Yet, there’s a larger problem at play in the overall economy. Housing costs for this consumer demographic are hurting this consumer segment. Rental prices are going through the roof, as are health care costs. Remember, this demographic didn’t have to shell out monthly premiums for health care until recently. In addition, note the stealth inflation out there of almost 10%, according to the Chapwood Index.
Low oil prices, however, have also had a negative effect. Suppose there are energy industry workers that shop at dollar stores? They’ve been laid off. Guess what? Texas has 360 Dollar Tree stores – a state known for its oil business.
Meanwhile, the Labor Force Participation Rate shows that more and more people are leaving the workforce. That means many can’t even afford to shop at dollar stores.
So what’s ahead for Dollar Tree? The market doesn’t seem to care much and has not sold off the stock. fiscal year 2016 is expected to be another year of low-single-digit same-store sales increases. The midpoint for EPS for the year is $3.50. That puts Dollar Tree at 22 times earnings.
That’s a crazy multiple for a business doing well in this space. I say stay away from Dollar Tree.
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