A surprising set of items are helping spur the growth of Dollar Tree, the super-duper discount chain where every item actually sells for a buck or less. We're talking about party supplies: everything from plates to wrapping paper to favors. During an economic crisis, aren't people supposed to be slouching on their couches, rather than honking on noisemakers? Apparently not. "This says a lot about the American consumer," says Timothy Reid, Dollar Tree's vice president of investor relations. "They want to keep enjoying and living their lives, but do so in a way that's cost-effective."
Whether more people are partying at home to save some dough, or flocking to Dollar Tree from other stores for cheap supplies, Dollar Tree, based in Chesapeake, Va., loves the fiesta. The chain, which operates about 3,700 stores in 48 states, saw its profits rise 51%, to $56.9 million, for the quarter that ended Aug. 1. In a depressed retail environment, same-store sales jumped 6.8% for the quarter; the retailer's shares have risen over 40% since mid-February. "For us, the world is our oyster," Gary Philbin, Dollar Tree's COO, said at a recent analyst presentation. "With other folks canceling deals or cutting back, Dollar Tree is still out there to take advantage and we can move quickly."
Is Dollar Tree moving too fast? If there's one lesson from the great retail shakeout of the past year, it's that America has too many stores. Yet Dollar Tree plans to open about 80 more stores by end of year, and foresees growing to between 5,000 and 7,000 stores down the road. But will an extreme discounter like Dollar Tree suffer when the economic winds move against you? "I do think Dollar Tree is a beneficiary of people trading down," says Laura Champine, an analyst at Cowen & Co. "When the economy recovers, I believe its growth will slow."
Despite the risks, many analysts still like Dollar Tree's plan. Though the worst of the downturn may be over, the recovery promises to be slow. "Extreme value is going to be the gold standard as far as the eye can see," says Howard Davidowitz, chairman of Davidowitz & Associates, a retail-consulting and investment-banking firm. In addition, Dollar Tree is well positioned to take advantage of low real estate prices. "Landlords are looking for growing retailers to fill vacant boxes," says Champine. "Dollar Tree fits."
Dollar Tree tends to look for locations in suburban shopping areas, near a Walmart, Target, Sam's Club or a large grocery chain, in an effort to lure bargain-seeking customers from these stores. "If we are where the shoppers are anyway, it's a win-win for the customer, and for us," says Reid. Boosting the number of stores may help it steal market share from its chief competitors, Dollar General and Family Dollar, which have also done well in the recession and have significantly more stores than Dollar Tree (around 8,500 and 6,500, respectively). Dollar Tree touts one big advantage over these rivals: unlike Dollar General or Family Dollar, none of its products are priced higher than a dollar.
Dollar Tree seems to have a knack for good timing. "They saw the recession coming," says Brent Rystrom, analyst at Feltl & Co., "and started selling more non-discretionary consumable products like food and health and beauty items." The store now sells Hormel sausages and Green Giant frozen vegetables, and over 1,200 of its stores now have refrigeration units. Now, in anticipation of an economic uptick, Rystrom is seeing Dollar Tree shift back to more discretionary items like decorations and toys, which tend to offer higher margins.
Rystrom also points out that Dollar Tree caters to a slightly more upscale consumer than its competitors do the company says the average family income for an average Dollar Tree consumer is above $40,000. Nor are these consumers likely to abandon Dollar Tree when times improve they may simply buy more discretionary items. "Consumers are watching every penny, and this isn't temporary," says Davidowitz, the retail consultant. "Dollar Tree is positioned phenomenally to win."