A solid quarter for DLTR with Dollar Tree comps accelerating to +4% from 3.1% last Q and much better gross margins, up 77bps. Family Dollar saw a slowdown in comps to 6.4% from 11.6% last Q, but still solid comp growth with improving discretionary category trends even as the stimulus tailwind has dwindled. Cost leverage provided solid margins for Family Dollar as well as improved shrink, helpful merch mix and lower markdowns. Management noted that comps in November have trended above the 3Q rate, which is definitely bullish, though we should note that both banners have an easier compare in 4Q. On the recent momentum and margin improvement, our near term numbers are marching higher.
The Big TAIL Call – Breaking The Buck
This is perhaps the best event to date for the long term bull case around breaking the buck at Dollar Tree. Management noted the test will be expanded to 500 (from 100) stores in spring 2021, something we’ve been waiting to hear and very bullish for the multi price point future of DLTR.
There was some other comments on the test from management saying :
“Our customers are buying these products and sales of our multi-price items continue to grow. In fact, we are seeing that when multi-price items are included in the basket, the average transaction value is approximately twice the size. Recently, we've been seeing phenomenal sell-through of Dollar Tree Plus! items and seasonal merchandise. We are expanding our discretionary assortment to focus on sales and margin-driven categories that do not cannibalize current sales, are accretive to the business and bringing great value to our customers. These $3 and $5 items will also be leveraged through our Family Dollar stores when it makes sense.”
The comments around rising sales of multi-price point, particularly with the improvement in merchandise is exactly what we want to see. We highlighted after last quarter that the nature of the test means it takes time to really improve the value proposition for customers. The timeline chart below from our Feb 2020 DLTR black book shows this. In the middle of the 2020 we started to see more compelling value offerings for customers on the shelves with product that was clearly sourced by the Dollar Tree merchants, as opposed to shifted Family Dollar goods. That means the test should perform better, then as you expand the test, the increased scale creates new opportunities in sourcing meaning you can offer even better value, so the test does better still and can then be expanded yet again. Eventually the Dollar Plus offering is large scale and driving the incredible value for the consumer that Dollar Tree has done at the $1 price point for decades.
As noted by the comment from the CEO above, it’s a side benefit that the new multi-price point sourcing operation can create better traffic driving value at Family Dollar as well. One of the criticisms within our DLTR Activist Playbook deck in 2018 was that DLTR had done nothing to leverage its Dollar Tree buying operation at Family Dollar. It seems that is no longer the case, which is bullish for longer term productivity and margin improvement at Family Dollar as well.
Driving compelling value for the consumer at multiple price points has its own benefit in terms of traffic, share, and new customer wins. But the better opportunity is the direct impact to the earnings profile of the company. The basket grows, comps rip, and merch margins actually climb from the whole dollar price point limitations (rounding up to the nearest price point by buyers). The math on the earnings tailwind is below, but we think breaking the buck can add $5-$7 in earnings over the long term when scaled across the store fleet and customers buy more and more of the higher priced items.
With the test following the cadence we expect, we think TAIL earnings per share is headed north of $10.00. If we’re right we see upside to $140 over 6-9 months and $200+ over 2-3 years.
