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Dollar Tree, Inc. (DLTR) Still A Buy?

 May 18, 2012 11:34 AM

(By Michael Vodicka) Extreme-value retailers have seen huge gains over the last few years. Sales and earnings are up across the industry as high levels of unemployment and wage stagnation have consumers looking for bargains. But the space has become more crowded too, with new stores rushing to fill demand. Margins have also been on the upswing, raising concern about future the sustainability of earnings growth.

These are the questions confronting Dollar Tree, Inc. (DLTR), the extreme-value retailer that sells everything for $1. The company is an established name in the $1 space, with the 4th largest market share in an industry that is dominated by four names.

[Related -Family Dollar Stores, Inc. (NYSE:FDO) Q1 Earnings Preview: What To Watch?]

With a market cap of $11 billion, Dollar Tree is barely a large capper. But keep in mind, shares are up big in 2012, so just as recently as January this was a $7 billion company. That speaks of the company's broad national exposure, operating 4,451 stores in 48 states and 5 Canadian Provinces, providing Dollar Tree with strong regional diversification.

On the chart, DLTR has been blazing higher in 2012, recently hitting a new all-time high in early May that had shares up 25% on the year. But the action has cooled since, with DLTR pulling back from above $104 to $96. Although some of that weakness has to do with general market volatility, it also comes on the heels of the company's slightly disappointing earnings forecast in otherwise strong Q2 results.

[Related -Dollar Tree, Inc. (DLTR): Healthy Cash Flow, Superior Returns Should Allay Investor Concerns]

Q2 Results

Sales were up 12% from last year to $1.72 billion. Comparable-store sales also looked good, climbing 5.6% on top of a healthy 7.1% from last year. Earnings of $1.60 squeaked by expectations of $1.59, providing a small taste of the company's slightly weaker than expected guidance, projecting Q3 earnings between 87 and 93 cents, below the consensus of 95 cents. And that was where the concern came from. The Street is definitely a game of inches.

And even though DLTR only charges $1 for its goods, it still has a pretty solid margin profile, with operating margin up 40Bps from last year to 10.9%.


DLTR's success has been driven by its ability to increase retail square footage. In its most recent quarter, it opened 110 new stores, closed 10 and expanded or relocated 44. That helped grow total square footage by 7% from last year. Looking forward, the company is on track to add a total of 315 stores and execute 75 relocations and expansions for a total project count of 375.

DLTR is also one of those rare companies producing enough free cash flow to fund its growth organically. The company finished the quarter with $382 million in cash and equivalents and no long-term debt.

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