Motley Fool -
By Lawrence A. Rothman, CFA August 31, 2007
Don't tell Dollar Tree (Nasdaq: DLTR) we're in a difficult economic
environment. Before drifting back down a bit yesterday, Dollar Tree's shares
shot up 5.4% on Wednesday, on word of favorable quarterly results.
The company earned $0.33 a share, 18% higher than a year ago. That's no real
surprise, since three weeks ago, it announced that same-store sales increased
4.4%, for the sixth straight quarter of better than 4% comps. Citing the strong
comps increase and the associated leverage that comes from higher sales,
management met its jacked-up earnings forecast of $0.32-$0.33 a share, and it
also increased guidance for the year. That was a pleasant surprise, and it was
what likely sent the stock higher. It now expects to earn $2.04-$2.14 a share
for the year.
As for margins, the gross margin expanded 40 basis points, to 33.6%. The
operating margin was essentially flat from a year ago, but excluding charges
relating to settling employment litigation, it actually widened by 34 basis
The company is showing no ill effects from a consumer that has reportedly been
strained by factors such as high gas and food prices, higher mortgages, and a
housing slowdown. Competitors don't seem to be doing as well. There was a strong
comps increase at 99 Cents Only Stores (NYSE: NDN), but it didn't translate into
bottom-line growth. Family Dollar (NYSE: FDO) lowered its outlook for the year.
Meanwhile, traffic increased at Dollar Tree's stores. My wife and kids helped
... they can always find an excuse to buy something there.
Rents may be getting higher, but Dollar Tree's stores -- many of which are in
convenient strip-mall locations -- can attract middle-income customers, who are
probably more immune to those pesky economic factors.
Unfortunately, even if its merchandise sells for a dollar a shot, I can't say
the shares are cheap at 21 times trailing earnings. Enjoy your shopping, but I'd
advise you to leave the shares on the shelf.