(By Kevin Donovan) This time, Sherlock, the dog barked once. After a "flash crash" Thursday morning at the market open, shares of Dollar Tree (DLTR) rebounded smartly but still ended the day lower to offer what we think is an attractive entry point.
Traders blamed the initial plunge on a black box overheating somewhere. That algorithmic yelp soon faded to a more rational response to the company's earnings announcement, which we viewed positively.
After a drop of more than 20% out of the gate, the stock ended 1.78% lower at $49.11, largely because guidance was a tad lower than analysts had been looking for. As we expected, Dollar Tree beat estimates and we were buyers ahead of the results report. With comp-store sales up, margins improving and the growing opportunity in Canada, we look for better-than-expected results in the months ahead.
In the quarter ended July 31, Dollar Tree earned $0.51 per share, above the $0.47 average forecast and the $0.39 per share in the year-ago period. Estimates ranged between $0.45 and $0.48. Revenue came in at $1.704 billion, a tad below the $1.71 billion average estimate and compared with $1.54 billion a year ago. Forecasts ranged between $1.68 billion and $1.73 billion.
The big story in the earnings beat was an 80-basis-point improvement in the operating margin to 10.8%, largely because inventory turns were up and selling, general and administrative costs were quiescent. Comparable-store sales were up 4.5% in the quarter
Dollar Tree has consistently exceeded EPS forecasts with beats in the previous three quarters of 2.0%, 1.3% and 4.8%, and we expect that streak to continue for a couple of reasons.
Shares of Dollar Tree are up 18% this year, having traded between $30.56 and $56.81 in the last 52 weeks. The stock is valued at about 17.2 times forward earnings estimates, a premium to the S&P 500 and its competitors, Dollar General and Family Dollar. On a price-to-sales basis, Dollar Tree is also richer than competitors. But we think the valuation is warranted and that a bigger premium could materialize as the company executes on sales growth and cost containment.
In the quarter, Dollar Tree opened 77 new stores, bringing its total to 4,523. Selling square footage was up 7.1%.
In a conference call with investors CEO Bob Sasser highlighted the company's continuing rollout of refrigerated and frozen food sections and higher-margin discretionary SKUs. Sales plus productivity equals higher profits.
"Along with opening new stores, we are focused with operating more productive stores. Efforts have been concentrated on improved site selection, on right-sizing our stores, expanding our assortments, improved staffing, building the bench of qualified store management, and on opening new stores earlier in the year. Average new store productivity has increased in each of the past six years, and the trend has continued through the second quarter of 2012," Sasser said.
Dollar Tree, Inc. operates discount variety stores in the United States and Canada, providing stuff you need at low prices, typically at the fixed price of $1.00. Merchandise includes consumables, including candy and food, and health and beauty care products; and household consumables, such as paper, plastics, household chemicals, and frozen and refrigerated food. Its stores also offer toys, durable housewares, gifts, party goods, greeting cards, softlines, and other items; and seasonal goods consisting of Easter, Halloween, and Christmas merchandise.