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Dollar Tree Idea Proposal (DLTR, DG)

Dollar Tree Idea Proposal (DLTR, DG)
 

Are Dollar Tree’s integration initiatives at its Family Dollar stores producing cost savings and sales growth?

Report Available: February 15, 2017

 

Blueshift’s initial research shows DLTR making progress with the integration of the Family Dollar (FDO) stores the company acquired in July 2015. DLTR and its customers have said the FDO stores are cleaner, there is a broader assortment of merchandise offering greater value, and in-stocks have improved. While there is an optimistic outlook for convenience stores in 2017, competition and price cuts, especially from WMT, loom large as DLTR attempts to turn around its FDO stores.

 

Observations

  1. DLTR reported Q3 results with earnings beating expectations and revenue falling short. Comp sales were up 1.7% for the quarter due to higher customer traffic and a larger average basket. Management expects same-store-sales to grow in the low single-digit range for both Family Dollar and Dollar Tree stores in Q4, and EPS guidance was revised upward.
  2. DLTR announced management changes this month. Duncan Mac Naughton, a longtime executive of WMT, has been appointed president and COO of Family Dollar. Also, Gary Philbin a 15-year employee of DLTR was promoted to enterprise president. He will be responsible for store operations, merchandising, marketing, and real estate across all banners including Dollar Tree, Family Dollar and Dollar Tree Canada stores.
  3. The third-annual Convenience Store News Retailer Forecast Study predicts a “Rosy 2017”. It showed that 88.6% of c-stores surveyed expect average sales per store to increase in 2017 vs. 2016. The remaining 11.4% expect flat sales and none predicted a decrease in sales. Positive expectations also come from Fitch Ratings’ Outlook report which predicts that retail sales will grow 3% to 4% in 2017. Fitch identified DLTR as a retailer on a positive trajectory. Competition was cited as one of the top factors that will affect retailer sales and profitability in both studies.
  4. Despite the positive future retail projections, navigating the competitive landscape will present DLTR with several challenges. Deflationary forces, a decline in food stamp benefits, and price investments from WMT were cited as reason why DLTR competitor DG missed expectations and cut Q4 guidance. WMT has continued to lower its prices and is cutting back on new store openings to focus on improving in-store experience, price investments, and expanding its popular grocery pick-up program.
  5. Blueshift’s Nov. 10, 2016, report found that a year into the ongoing integration by DLTR, changes at Family Dollar are taking hold slowly. Sources believe Family Dollar retail operations are improving but that a turnaround will take time. Initiatives that appear to be working are more frequent store cleaning, more and better-managed SKUs, and improved quality of perishables. One source also said theft is down because of management reminders to use security tags. Market conditions were described as strong or stable year to year by nine sources and challenging or worse by three. The improving economy has not been enough to curtail bargain shopping.

 

What stage of change are FDO stores in and how are they performing since the DLTR takeover? At what stage in the integration effort do stores experience increased traffic and improving sales? What changes have been made in merchandise, inventory levels, number of SKUs, private label and perishable offerings? What effect are these changes having on traffic levels, average basket, basket make-up, and sales? What cost savings are being achieved? How are consumers’ increased wages impacting DLTR? How is the competitive landscape affecting DLTR? What is the effect of ongoing food deflation and SNAP changes? To answer these and other questions, Blueshift will issue a market research report by gathering data from independent sources in the following areas: Suppliers, Distributors, Regional managers, Store personnel at FDO stores, and Industry specialists.

 

Companies: Dollar Tree (DLTR), Dollar General (DG), Walmart (WMT), Big Lots (BIG), Target (TGT), Walgreens (WAG), CVS (CVS), Rite Aid (RAD)

 

Research Begins: Jan. 30, 2017