Dollar Tree Stores, Inc.

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Dollar Tree Stores, Inc.

500 Volvo Parkway
Chesapeake, Virginia 23320
U.S.A.
(757) 321-5000
Fax: (757) 321-5292

Public Company
Incorporated: 1986 as Only One Dollar, Inc.
Employees: 11,000
Sales: $635.5 million (1997)
Stock Exchanges: NASDAQ
SICs: 5331 Variety Stores

Dollar Tree Stores, Inc. is the largest operator of discount variety stores in the United States selling merchandise priced at $1.00. With stores designed to update the traditional variety store concept, the company offers a wide assortment of general merchandise, including food, toys, housewares, health and beauty aids, hardware, books, stationery, and other consumer items. As of December 31, 1997, Dollar Tree operated 887 stores in 26 states in the South, Southeast, Mid-Atlantic, Northeast, and Midwest regions of the United States. The company estimated that in 1996, 85 to 90 million people shopped in its stores, which operated under the names of Dollar Tree, Dollar Bills, and Only $1.00.

1986-90: From Toys to a Dollar Store

The founders of Dollar Tree, Inc. first worked together managing K&K Toys, Inc., building that company from one toy store to a 136-store toy retailer. In 1986, the three men, J. Douglas Perry, Macon F. Brock, Jr., and H. Ray Compton decided to diversify and established a new company, incorporating it in Virginia as Only One Dollar, Inc. “We had all started out in the variety store business, so it seemed a natural transition for us,” Brock told Chain Store Executive. The company opened with five stores in Virginia, Georgia, and Tennessee, and, typical of the dollar format, offered primarily closeout merchandise. Perry became chairman of the new company, Brock served as president, and Compton was executive vicepresident and chief financial officer.

Over the next five years, the company grew to 171 stores, while the three men continued also to manage K&K Toys. In October 1991, they sold the toy chain, then one of the largest mall-based toy retailers in the country, to a subsidiary of Melville Corporation, and turned their full attention to their discount operation.

1991-92: Changing Inventory and Locations

They began by implementing two major strategic shifts in their efforts to expand. First, rather than continue to be a purveyor of closeout merchandise, they moved to make their stores the modern equivalent of traditional variety stores, with a wide assortment of basic goods priced at no more than $1.00.

To do this, they had to change their purchasing strategies, which had emphasized deals and novelties. They started buying directly from foreign manufacturers and worked with manufacturers in the United States to offer customized packaging, a broader selection, and products that were larger or held more than normal. Management’s aim was to “exceed its customers’ expectations of the range and quality of products that can be purchased for $1.00,” and to offer at that price items that other stores usually sold for more.

To underscore that value, they also changed where they located stores. Until then most of the stores were in enclosed malls, since that was what management knew from K&K Toys. Now they concentrated on opening stores in strip centers anchored by a large grocery store or a mass merchandiser such as Kmart, Target, or Wal-Mart that it could undersell. That strategy not only helped customers compare prices, it also saved the company money, because strip centers generally charged less rent and tended to generate higher operating margins than mall locations. By the end of 1992, the company had 256 stores. Net sales for the year grew by over 70 percent from $71.1 million to $120.5 million with net income of $10.8 million.

1993-95: A New Name

During 1993, Macon Brock, Jr., was named CEO, the company changed its name to Dollar Tree Stores, Inc., and Dollar Tree continued its expansion, gaining a net 72 new stores, all of which were located in strip shopping centers. Because management believed their stores had a relatively small shopping radius, they were able to open several locations in a single market without having the outlets compete with each other for customers. Most of the stores were located in mid-sized cities and small towns; the rest operated in major metropolitan areas. New stores historically were profitable within their first year of operation, and that fact reinforced the company’s expansion plans of opening new stores rather than growing through acquisition or merger.

The typical store was approximately 3,200 square feet, with 85 to 90 percent of that area devoted to selling space. Unlike many of its dollar competitors, Dollar Tree paid a lot of attention to the design of its stores and the physical presentation of its merchandise. The chain used the same layout plan in each of its stores, with merchandise organized by category and displayed in densely stocked bins and shelves. Carpeting, bright lighting, background music, and the use of vibrant colors such as red checkout stands, made the stores attractive and comfortable. With an average purchase of $6.50 per customer, the chain did not accept credit cards, nor did it scan purchases at checkout. “We locate our stores where people are already shopping, hoping they will be curious enough to check us out,” Brock explained to Chain Store Executive with Shopping Center Age. “And then we try and make the outlets as easy as possible for customers to get in and out of.”

By the end of 1993, the chain had 328 locations, sales of $167.8 million, and net income of $9.5 million. The drop in income was due to $4 million in costs associated with a recapitalization. As part of the recapitalization, the founders and their spouses sold 50 percent of the outstanding stock to The SK Equity Fund, L.P. and four associates for a total of $23.6 million.

The company continued its successful formula in 1994, expanding to 409 stores, with sales topping the $200 million mark for the first time to reach $231.6 million. One of the key factors in the company’s operations was its distribution system. Sharing space (186,000 square feet) at the Norfolk headquarters was one of the company’s two distribution centers; the other, with 244,000 square feet, was located in Memphis, Tennessee. This capacity allowed the company to buy large quantities at good prices and to receive early shipment discounts, thus keeping prices within its $1 range. Given the relatively small size of most of the stores, backup inventories were kept at the distribution centers, with stores receiving weekly shipments of merchandise from the centers. During the busy Christmas season, the company could make two weekly deliveries to high-volume stores.

The company began 1995 with the creation of two subsidiaries, Dollar Tree Management, Inc. and Dollar Tree Distribution, Inc. In March management took Dollar Tree public, and during the year the company opened its 500th store. Sales topped $300 million, with per share earnings of 76 cents.

1996: Acquired Dollar Bills, Inc.

In January 1996, the company bought Dollar Bills, Inc. for approximately $52.6 million in cash and $2 million in inventory. The purchase moved the company into three new states (Iowa, Minnesota, and Wisconsin) and added 136 stores, increasing Dollar Tree’s store base by 27 percent. A modern 250,000-square-foot distribution center and a wholesale division in the Chicago area completed the acquisition.

Most of the Dollar Bills stores were concentrated in urban areas, a different retail market than the existing Dollar Tree stores. The new additions were also typically larger (4,000 to 4,500 square feet), had higher average sales, and carried less inventory per square foot. They also had a higher proportion of low-margin items such as food, health and beauty aids, and household supplies. According to the company’s 1996 annual report, the acquisition “taught us about urban marketing, intensified our commitment to variety merchandise, and showed us new ideas in warehousing and distribution.” By the end of the year, the new acquisitions had been successfully integrated into the company. To help make sure that all locations followed the same operational procedures, the company instituted a new training program, “Dollar Tree University,” at corporate headquarters.

In April, the company initiated a stock dividend, with the effect of a 3-for-2 stock split, and in June, made a second stock offering to the public. While Asia continued to be the company’s largest source of imported goods, the company added sources from Italy, Brazil, Argentina, and Mexico to its list of vendors. Imports made up over one-third of Dollar Tree’s merchandise, and around 40 percent of its sales. Closeout merchandise, which had been the company’s initial concept, now made up less than 15 percent of its offerings.

In evaluating the overall merchandise mix, the company added more higher-margin inventory such as toys and gifts to the items available at the Dollar Bills locations and more consumable products on the shelves of the Dollar Tree stores. The integration was accomplished with little disruption to either the company’s opening of 104 new Dollar Tree stores nor the operations of the individual stores. Over 90 percent of the Dollar Tree stores that were opened the entire year had operating income profits of more than 15 percent, as did over 85 percent of the Dollar Bills stores. The company ended 1996 with 737 stores and sales up more than 64 percent, to $493 million. About half the increase was attributable to the Dollar Bills operations.

Company Perspectives:

Dollar Tree Stores, Inc. is a customer-oriented, value-driven variety store, operating at the one dollar price point. We serve our customers by providing the best value for their dollar.

The mid-1990s were a tough period for many of Dollar Tree’s competitors. Several, including Jamesway Corp., Ben Franklin Retail Stores, 50-Off Stores, and Solo Serve Corp. were no longer publicly traded by the end of 1996. Others closed many of their stores or abandoned the $1 concept.

1997 and Beyond

In January 1997, Dollar Tree began construction, at an estimated cost of $34 million, of a Store Support Center in Chesapeake, Virginia, 10 miles from its Norfolk location. In April, Dollar Tree issued $30 million of unsecured notes to pay off some of its existing revolving credit facility so that the credit could be used to fund capital expenditures for the Store Support Center. In June, the founders, SK Equity Fund, and other shareholders offered 4 million shares of Dollar Tree stock for sale. The company itself did not receive any of the proceeds of that sale, but in July, issued a three-for-two stock split.

During the year, the company continued to grow according to its expansion play, opening a net 150 new stores, and reaching 887 locations. Many of the new locations fit the company’s larger prototype for future Dollar Tree stores, which increased store space to between 3,500 and 4,000 square feet. The company hoped that by creating larger aisles, with more space for recently added shopping carts, customers would buy more. Net sales for the year rose nearly 29 percent to $635.5 million, with sales at stores open for a year up more than seven percent. Net earnings increased from $33.8 million in 1996 to $48.6 million. This performance occurred as one of the company’s variety store competitors, Woolworth’s, closed its stores in the United States.

Staff moved into the new corporate headquarters at the Store Support Center before the year ended, and the new, automated distribution center began operating in January 1998. With an automated conveyor and sorting system, the new facility had the capacity to support up to 800 stores. Dollar Tree president and CEO Macon Brock, Jr., announced that the company was in the process of buying land in Olive Branch, Mississippi, for another distribution center to replace the nearby Memphis facility. The Olive Branch center, some 425,000 square feet in size, was expected to be in operation in early 1999.

In March 1998, certain shareholders, including Brock and the other founders, along with SK Equity Fund, filed to sell 4.5 million shares of Dollar Tree stock. “There’s nothing wrong with the dollar-store concept,” Brock told Chain Store Executive with Shopping Center Age. “But the way you execute it can mean the difference between success and failure.” By concentrating on finding a wide variety of merchandise it could sell for $1, by making its stores exciting and attractive, by closely watching costs, and by locating its stores in centers where their customers were already shopping, Dollar Tree obviously had found its niche. As Brock summed it up, “The failure of the traditional variety store, as seen in the recent closing of Woolworth’s, and the dominance of the big-box retailers have left a huge gap that we can fill.”