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No. of Recommendations: 17
for the most part
at least as far as sometimes getting something right
i tried to post on VIC a lttle while ago but they wouldn't let me
VIC won't allow ideas to be reposted if they've been posted within 6 months
even if the stock is down a lot
which means you have to come up with an idea worth buying with a particular time schedule and on command - which is impossible so you have to post ideas just to post ideas
I post this just to remind myself to be confident sometimes and cause now it can never be posted (stock is up more than 20% since this point)
Dollar Tree was just written up by werd725 on 4-19-17. This is just updating that idea with my take, esp since the price has fallen more than $10 or 2.4b since the previous writeup.

Thesis - A well-entrenched retailer successful for more than 30 years currently generates about 1.8b in gross cash flow can now be had for a market value of around 16b, or for a gross cash flow yield of 11%. However, gross cash flow is not free cash flow, so the issue then is whether you believe the gross cash flow is being spent wisely. Money spent on the flagship dltr stores is clearly wonderful, and debt paydown is also a good use of cash. The problem is that management continues to plow money into the fdo stores, an area whose problems are well-known (low margins in part due to previous management but with little improvement so far and competition issues - see below) though any progress at all there could serve as one of several catalysts for the stock - or if it doesn't work, capital allocation will be reinvested in the great chain vs. the crummy one by a chastised management team.

Some personal background - I have followed DLTR for as long as I have invested, and I don't know anybody who has actually shopped there who wouldn't purchase Dollar Tree right now if they didn't have the FDO baggage. Unfortunately for them, DLTR has been dragged down by the combination of both hysteria and utterly justified fears about Amazon's entry into groceries recently punctuated by the acquistion of AMZN. Clearly AMZN is a well-regarded nearly infallible competitor (whose CEO was called the "most remarkable business person of our times" by WEB), but on the surface they could be just buying a sick and lurching health food supermarket chain selling extremely high priced items so, according to recent press reports, strangers can handle and select your produce and deliver it to you for prices that likely exceed those where you can pick it up at any store that isn't organic. And while this will surely appeal to people who are incredibly price insensitive the idea that this will threaten a shopping visit by anybody living paycheck to paycheck on a budget to a single price dollar strore is crazy. I will admit though that if AMZN wants to dominate the wonderful world of $1 merchandise, including candles, party supplies, sun glasses, motivational cones, and cards and cheap candy and aluminum wrap, they can surely do so but perhaps it isn't the most likely goal of theirs in the every growing summitt of world-beating possibilities that they are contemplating. Who knows. That said, FDO is clearly more in the crosshairs of intense competion but then again a lot of these stores are in rural locations where delivery may be impractical for low dollar items (who knows for sure though). I still feel like that even if AMZN dominates the world, there will still be a place for some retail chains - and dltr is clealry one of them and maybe FDO can be one too.
So, here is a quick summary of positives and negatives.


*the appeal of terrific $1 merchandise in one setting can not be overstated. Raising children for 15 years or so and working as a 2nd shift money manager for much of that, going into a Dollar Tree was the purest form of kid bribery (good for them, good for me) I ever had, as my child could look thru the toys (and some great ones - Power Ranger closeouts at one time) and regardless of what he or she picked each item was $1 each. And from personal experience let me say that the merchandise just continues to astound. Just last year I picked up multiple copies of Loomis's Tap Dancing to Work and and not long ago a good good friend sent me a whole boxload of Motivational Cones with incredible effective and encouraging sayings - all for a $1. If you shop these stores, you know the appeal, and franly it works for many single price point retailers - look at the fantastic success of FIVE which took the idea up to $5 or Dollarama which continues to astound up in Canada. This is an idea that works, and it always works, and it will alway work in the future (what about inflation? DLTR stores are not supermarkets - they can change the skus in a heartbeat - the merchandise has gotten better over time in my opinion) because, in essence, the merchandise is very good and if you pick up 10 items the bill will be $10 and tax. Hard to beat that, period.

*there's still a lot of room left for Dollar Tree. My town of 80k-85k has but one store and 15k stores will eventually populate the country (company says 10k, but these things are always moving targets), and there is plenty of room for expansions of the existing base with a bit over 6000 today.

*there is nothing weird about this idea. The grow earnings by opening stores, and then the next year they open more, and the year after that they open more again. I've followed this since 1998 (980 stores then) and it has been the same story for as long as it has existed. No dispution here, no technological change wiping out the appeal, just really great $1 items you can buy with the values always changing (by the way, if you wonder about the quality of the merchandise, check out OLLI for the appeal of close-out stuff; there is a huge market for a bargain, and we visit these stores at least 3x a month). Conference calls are a pleasure to read, store visits actually count as investment research (bring your kids and wife/husband too!), and there is nothing in research reports that add any value to your own opinion, so if you form one you can be assured that nobody's research will top you.

*it trades for 13.5x 2018 earnings from VL which assumes 4% top line (too low) and 12% EPS growth. Management buys shares, could eventually pay a dividend if they want, and will whittle down debt (375m interest expense in 2016). If FDO does anything, the numbers will look even better. The stock is very cheap, both historically and especially in this market.

*FDO might not be a dog forever but you can win even if it is. Course, at this price it doesn't matter anymore in my opinion, but even a little bit of margin improvement in FDO would help and there don't appear to be any structural reasons FDO must be so much worse than DG even as competition continues to be relentless, but it is relentless now and these stores continue to flood the country. And if all the other stores eventually go belly-up, that will leave some real popular places left over - like Ulta, TJX/Marshalls, Dollar Tree, and a bunch of restaurants.


*buying FDO was bonehead move - everything was going fine with DLTR, the stock was up 10x since 2007, but then management made the very ill-considered decision to go from being the dominant retailer in $1 merchandise essentially competing with no one to buying a chain competing with everyone but esp. big brother Wal-mart which was insane but they did it and it is time to get beyond it. The worst part of DLTR's story is the intention to continue to self-inflict hurt on itself (by opening so many FDO when they ought to open none perhaps) but if things don't get better eventually mangement will come to its senses.

*debt on the BS. There is still a lot left but they concept generates a ton of FCF and will pay it down very rapidly. You might not think so but dollar merchandise sales are recurring - you go back again and again and again and it will never get old, and you don't get poor after shopping there. Even if sales get weak during a specific quarter, it isn't like this is anything to worry about. Just take your kids to a store and you'll see.

*short-term focus on comps and margins and all these other things can drive down the valuation. Usually this is a big deal, but it is a bigger deal when the stock is at $80 or $90, not now. The company has dropped nearly 2-3b in just the last 30 days. At this price, I feel you can ignore this crud in favor of how it might look 3 to 5 years out. In essence, I'm hopeful DLTR will make a lot more money 5 years from now.

*Competion. While nothing is impossible, dominating the $1 store industry perhaps won't be a big priorty from Amazon. Aldi is a threat due to low prices (and, in my opinion, objectionable food quality) but other than really nicely priced hardware type items aldi is a grocery store, not a seasonal $1 retailer you go to for party supplies and cards and the like. WMT pricing is clearly hurting FDO but competition will always be tough, but WMT is not a $1 store and you aren't going to find motivation cones there or you do it will take you a while to find them. I think these things co-exist as they always have and the fact of the matter is there is no national public player in the $1 space. Have always wondered but my conclusion is it must not be that easy to run these stores. And sure, FDO faces competition, but it is a convience place and has a niche mostly based on location. And eventually maybe DLTR sells it to DG.

That's it. Simple idea, simple writeup, nice price. as a side note, dltr was recently written up by Whitmer in the Barrons' mid-year roundtable - you can get it $8 cheaper than her recommendation, and nothing changed.
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