Single Price Point Business Model And Flexible Merchandise Assortment Make Dollar Tree (DLTR) A Top Pick For Senior Analyst At Piper Jaffray; Read More Retail Picks In This Exclusive Interview
September 28, 2011 - The Wall Street Transcript has just published Retail Report offering a timely review of the Retail sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Peter Keith, a Senior Research Analyst for hardline retail and consumer products, is a Vice President at Piper Jaffray & Co. Before rejoining Piper Jaffray in July 2011, Mr. Keith worked as a Senior Analyst at JMP Securities. Previously, he worked at Piper Jaffray as a Research Associate on the hardline retail team from 2005 to 2009. From 1997 to 2003, he worked at RS Investment Management Co. LLC in San Francisco, where he led the company's institutional and retail mutual fund sales effort. Mr. Keith was awarded the "Best Up and Comer" in the retailing/hardlines category in Institutional Investor magazine's annual poll for 2010. Mr. Keith holds a bachelor's degree in chemistry from The University of Vermont and a master's degree in business administration from the University of Michigan.
TWST: Are certain niches better positioned to have pricing power, or is it more a company-specific issue?
Mr. Keith: It tends to be more industry-based, in my opinion. Two examples: PetSmart, in the pet industry, is a company we believe has pricing power. They're seeing the largest inflation within their businesses within pet food. A lot of pet food ultimately comes down to corn and grain prices, whether those grains are going directly into pet food or those grains are used to feed chickens or cattle. Pet owners tend to treat their pets very well, almost like children. So when you have a pet on a particular brand of food, pet owners are very unlikely to switch their dog or their cat to another cheaper brand if prices go up. They have a quality standard that they want to maintain, and they know switching a pet's food can actually be detrimental to the pet. As a result, we tend to see, even when prices go up in pet food as they are right now, the overall unit sales of pet food do not change materially. Overall, rising prices can actually be a slight benefit to a retailer like PetSmart.
TWST: Has there been any recent news from the companies you cover that's worth noting?
Mr. Keith: One company that we cover is hhgregg (HGG), the specialty consumer electronics retailer. With Circuit City going out of business, they're now the number two specialty retailer of consumer electronics, behind Best Buy (BBY). Their results were out today. A very large portion of business is appliances, about 35% of their overall sales. And appliance sales in general have been quite weak this year. And in the spring of 2010, there was cash-for-appliances stimulus program, and that drove very strong sales in appliances much like the first-time homebuyer tax credit. Since that stimulus has expired, appliance trends have been quite weak, and in some cases, declining year to year. Through the end of June, that was the case at hhgregg. But it seems that for the month of July, which they just spoke to qualitatively, they appear to be seeing an improving trend with appliances, and I think that's encouraging big-ticket items that are important within households are still being bought by homebuyers. If you look out across my universe, Home Depot and Lowe's have large exposure to appliances. I think that's an interesting trend that we want to continue to monitor.
TWST: Where are you pointing investors now? What are some of your favorite stores?
Mr. Keith: I like names that have specific sales and margin drivers that will allow them to grow their business regardless of the economic environment, and I like companies that have pricing power. So I like Dollar Tree (DLTR), a single price-point retailer, $1-only pricing across the U.S., typically located in the suburbs serving middle-income America.Tractor Supply (TSCO) is another name that I like. They are a specialty retailer serving the hobby-farming segment, which is a very unique area but it's actually quite large. They are the Wal-Mart of hobby-farming retailers. So anyone that may live on a farm but not generate the majority of their income from that land, they have special needs and wants that Tractor Supply caters to. PetSmart would be the last one. They are the pet specialty retailer. We like some of the trends we're seeing about with trade-up going on in pet foods. People are more focused on higher-quality foods to feed their pets, so they're buying more expensive, higher-margin pet food products. And some of those inflationary trends I talked about actually are favorable to PetSmart, to drive some sales and extra EPS growth for this year and next year.
TWST: What is it that set Dollar Tree apart from their competitors?
Mr. Keith: They are the country's largest single-price-point retailer. So you hear other retailers out there that have the word dollar in their name like Family Dollar or Dollar General (DG), but those are multi-price-point generally, pricing items at $10 or less and serving lower- to middle-income America, but they do have varied pricing. Dollar Tree is very interesting because they have a single-price-point, and they also have a very flexible merchandise assortment. For example, they are always going to carry some form of toothpaste, but they are not expected by their customers to always have Crest (PG) or Colgate (CL). It's more of a treasure-hunt-type shopping where you go to the store, you know you're looking for toothpaste, and you just kind of want to see what they have that's only going to cost you $1. And so regardless of whether prices are going up, they can change their merchandise, they can move to other brand names or they can get out of a category entirely if the costs have gone up to a point that they can't make money on something by selling it for a dollar. As a result, they're not as impacted by rising prices, and they offer a very good value to customers. So they're a market-share gainer that have just put up very good, consistent sales growth for the last couple of years. We think they're going to continue to do that for several years going forward.
TWST: Are there any areas of your coverage or individual stocks that you're concerned about?
Mr. Keith: The one area, and I mentioned this name earlier, would be Family Dollar. We think they are in a tough position because they don't have very much pricing power. Now the company itself we think, on the items that it can control, it's a very good retail story. Those dollar stores, like Family Dollar and Dollar General, are generally taking market share away from Wal-Mart, and we've seen Wal-Mart's sales results struggle here in the U.S. I think there are several factors, but dollar stores are certainly a part of that. Family Dollar does have some gross margin drivers within its business. Those are the things you can control. What it can't control however, it is that the rising cost environment, and the headwinds we see against the lower-income segment of the country. Prices are going up. We don't think they can pass those through fully, so that will cause some gross margin pressure. And as we look at general employment trends, some recent changes to the tax policy, and the concern that as the long-term unemployment benefits expire at the end of the year, we think these things are all more meaningfully negative to the lower-income area. We think these trends may begin to show some negative impact on their sales results in the coming quarters.
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