DOLLAR STORE INDUSTRY OVERVIEW
The Dollar & Variety store sectors have grown by 2.8% to reach revenue of $77 billion in 2018. In the same time-frame, the number of businesses has grown by 2.3% with an increase of 3.5% in employment growth. By 2021, the number of Dollar stores in the U.S. is expected to grow to about 38,000. Over the past ten years, the industry has experienced steady store count growth, averaging upwards of 700 new stores annually in recent years. The market is dominated by Dollar General, Dollar Tree and Family Dollar accounting for more than 75% of the market share. Notably, Dollar Tree acquired Family Dollar in 2015. Locations take advantage of demographics in smaller communities typically too small for larger retailers.
The industry has historically targeted exclusively low-income earners, this consumer pool has expanded in recent years, shrinking the gap between middle-class shoppers and even some high-income earners. Bargain shopping has become an increasing point of pride for many wealthy consumers, and this trend has drastically increased the industry’s customer base. Despite top-line revenue growth, both companies are struggling with contracting gross margins. Both companies are working towards operating efficiencies and are still experiencing positive operating income growth in the last quarter. A real estate review of the market indicates a saturation of properties with lower NOIs. Better performing locations are still available with incomes above six-figures with wide swings geographically.
(see Median Asking Cap Rate and Price by Region).
DOLLAR GENERAL
Since 1939, Dollar General has grown to operated more than 15,227 neighborhood general stores across 44 states employing over 129,000. In 2019, Dollar General plans to open 975 additional stores. Cap rates for Dollar General increased 9 basis points in 2018 to 7.03%. Q1 2019, the company reported an 8.3% net sales increase to $6.6B over year prior. Same store sales increasing 3.8% due to increases in average transaction amount and customer traffic. Gross profit as a percentage of net sales decreased 23 basis points to 30.2% compared to year prior. Primarily attributed to increases in distribution and transportation costs, greater proportion of sales coming from products with lower gross profit.
In Q1 2019, total additions to property and equipment were $145M ($65M improvements, upgrades, remodels and relocations of existing stores; $36M for new leased stores primarily for leasehold improvements, F&E; $25M for distribution and transportation projects and $15M for technology system upgrades and projects. In 2019, the company opened 240 new stores, remodeled 330 stores and relocated 27.
Real Estate & Company Highlights
• 420 Investment Assets Currently on Market Nationally
• Median Asking Cap Rate 6.75%
• Average Store Size on Market 9,100 SF
• Median Asking Price $1,323,711 | $148.14 PSF
• Median NOI $89,506
• 10.9 Years Average Remaining on Lease
• Locations Primarily in Southern, Southwestern, Midwestern and Eastern U.S.
• In 2017, 101 stores were closed
• Approximately 68% of stores are freestanding, 32% in strip shopping centers
• Typical 15 Year Lease Term with Multiple Renewal Options; subject to Built-to-Suit
• Some Stores Subject to Shorter Term Leases with Renewal Options
From 2017 to 2018, cap rates dropped 81 basis points on sold single tenant sites. Current asking rates are up to 7.50% (up 110 basis points). This can be attributed to stronger property values and higher NOI in the Northeast.
FAMILY DOLLAR
Family Dollar was founded in 1959 and grew to over 8,000 stores across 47 states. In 2015, Dollar Tree acquired Family Dollar and assumed $1 billion in debt. As a condition of sale, several stores were required to be sold off as Dollar Express and were reacquired in 2017. In some locations, some Family Dollar stores have opened in the same plazas as Dollar Tree. (see Dollar Tree for 2019 Q1 combined company financials). Three years into the acquisition, Family Dollar has continued to drag Dollar Tree’s comp sales growth. In the 2018 4th Quarter, Dollar Tree took a $2.3 billion loss against its Family Dollar business. In first fiscal quarter 2019, the company reports the business turnaround is gaining traction. Continued efforts to optimize real estate portfolio has made a difference by improving same store sales results. These ongoing efforts are expected to carry increased costs through the first half of 2019. Family Dollar rolled out the H2 store model in 2018 across 350 stores, which includes improved merchandise offerings and expanded number of freezer and cooler doors. H2 stores have delivered increased traffic with average comparable store sales, increases of greater
than 10%. The company rolled out an additional 250 stores in 2019. It is slated to close up to 390 stores- a majority in Q2 2019, while renovating 1,000 other locations.
From 2017 to 2018, cap rates dropped 81 basis points on sold single tenant sites. Current asking rates are up to 7.50% (up 110 basis points). This can be attributed to stronger property values and higher NOI in the Northeast.
Real Estate & Company Highlights
• 130 Investment Assets Currently on Market Nationally
• Median Asking Cap Rate 7.50%
• Average Store Size on Market 8,320 SF
• Median Asking Price $1,213,500 | $138.82 PSF
• Median NOI $87,971
• 7.3 Years Average Remaining on Lease
• Recently Offering Sales Leaseback with 15 Year NNN Leases
• Build-to Suit Programs Structured as 15 Year Absolute NNN with 10% Increases in year 10
or every (5) Years.
• Smaller Footprint 6,000 – 8,000 SF Allows Company to Open New Stores in Rural Areas
and Small Towns.
• Most Stores are Operated in Leased Facilities
DOLLAR TREE
Dollar Tree operates more than 15,073 stores across 48 states employing over 176,000. Tenant carries a higher cap rate at 7.38%, a 39 basis point increase in 2018. First quarter fiscal 2019 reported a 2.5% increase in same store sales; consolidated sales of $5.81B (both Dollar Tree and Family Dollar business), an increase of 4.6% from year prior. Gross profit increased 1.6% to $1.73B from $5.55 from year prior. As a percentage of sales, gross margin decreased to 29.7% compared to 30.6% in the prior year. The decrease in gross profit margin was driven by lower initial markup at Family Dollar, higher domestic freight and distribution costs, shrink in the Family Dollar segment, and $6.7 million, or $0.02 per diluted share, of increased occupancy costs related to the accelerated rent expense for Family Dollar stores scheduled to close in 2019. In 2019, Dollar Tree plans to open 350 new locations and re-banner 200 Family Dollar stores to Dollar Tree. The company plans to introduce Dollar Tree Plus! across 100 test stores to provide shoppers with multi-price point products.
Real Estate & Company Highlights
• 42 Investment Freestanding Assets Currently on Market Nationally
• Median Asking Cap Rate 7.00%
• Median Asking Price $1,388,152| $144.93 PSF
• Median NOI $99,840
• 7.8 Years Average Remaining on Lease
• Vast Majority of Stores are Leased
• Typical Initial Lease Terms 5, in Some Cases 7 to 15 Years with Options to Extend.
• Has Presence in 48 states, D.C. and 5 provinces in Canada.
• First Half of 2018, Opened 150 New Stores and Closed 5 Locations
• Dollar Tree acquired Family Dollar in 2015 for $8.5B.
• Since 2015, the Company Has Reduced Outstanding Debt by Approximately $3.5B;
Investment Grade Ratings Were Upgraded in March 2018