- The Washington Times - Monday, January 9, 2006

Discount retailer Dollar Tree Stores Inc. says its fourth-quarter sales are meeting company expectations so far, despite what some analysts predicted would be weak holiday sales.

The Chesapeake, Va., company last week reaffirmed its fourth-quarter sales guidance of $1.035 billion to $1.065 billion compared with fourth-quarter sales of $987.5 million a year ago. The company is not releasing holiday sales figures until Feb. 2, the date of its conference call for the quarter ending Jan. 28.

Yesterday’s stock price closed at $24.96 compared with $24.24 Friday and $27.63 a year ago today.

Analysts say “extreme value” retailers face a struggle in the current economy.

Rising interest rates, unemployment and gas prices make it difficult for companies like Dollar Tree, which offers all items for $1 or less, to increase its customer base, said Jeff Sonnek, an analyst with Friedman, Billings, Ramsey & Co. in Arlington.

“In a booming economy, if you went back to the late ‘90s or early 2000, Dollar Tree and same-store sales were much more robust,” said Mr. Sonnek, whose company does business with Dollar Tree. “When you get crummy times, they get disproportionately hit.”

The stock has performed below expectations during the last nine holiday seasons, said Stacy Turnoff, an analyst with Merrill Lynch, which does business with Dollar Tree.

“Dollar stores typically underperform during the holiday season as they are not the main shopping destination for consumers given their merchandise mix toward consumables,” Ms. Turnoff said in a report that advises investors to sell.

Unlike discretionary merchandise, such as toys or decorations, consumables include food, health and beauty products and cleaning supplies. Forty percent of Dollar Tree’s inventory consists of consumable goods compared with more than 60 percent at peer stores, Mr. Sonnek said.

The company’s $1 ceiling limits its resiliency in some ways, he said.

“The dollar price point is probably the most difficult type of retailing out there,” Mr. Sonnek said. “If Wal-Mart is saying, ‘Our gross margins are getting squeezed by fuel prices,’ they can selectively increase pricing to help pass some of those costs onto the consumer.”

The company, which operated 2,923 stores in 48 states as of Thursday, is considering new ways to increase traffic.

“You’re going to see one strategy that they’re beginning to test is a more urban, a more metropolitan strategy, really placing these stores in more high-traffic areas,” said Mr. Sonnek.

The company’s store in Long Island, N.Y., averages between $3 million and $4 million in sales per year, versus the typical $1.2 million average of stores located in strip malls or second-tier shopping centers, he said.

The company also plans to finish instituting debit card readers in all of its stores by the end of this year, Mr. Sonnek said, adding that shoppers who pay with cards typically spend twice as much per transaction as those who use cash.

“America still loves a great deal. Just because gas is high doesn’t mean that’s not true,” he said.

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