Dollar Tree (DLTR)
is mopping up the bargains in a down economy, growing and expanding to increase its reach in the market segment most pressed to make a dollar stretch. Investors seem pleased with the results so far; the stock has demolished the S&P 500 over 12 months, and analysts see more to come.
Dollar Tree is a retailer focused on merchandise at the fixed price of $1. It operates 4,351 stores under the names of Dollar Tree, Deal$, Dollar Tree Deal$, Dollar Giant and Dollar Bills. Approximately 4,168 of these stores sell substantially all items for $1 or less in the United States and $1.25 (CAD) or less in Canada. Substantially all of the remaining stores, operating as Deal$, sell items for $1 or less but also sell items for more than $1.
“We offer a wide selection of everyday basic products and we supplement these basic, everyday items with seasonal, closeout and promotional merchandise . . . Closeout and promotional merchandise is purchased opportunistically and represents less than 10 percent of our purchases,” management said in a recent filing.
Growth has resulted from new store openings, store expansions and remodels and selective M&A, management said. “In the last five years, net sales increased at a compound annual growth rate of 11.8 percent. We expect that the majority of our future sales growth will come primarily from new store openings and from our store expansion and relocation program.”
Dollar Tree estimates that the optimal store size is between 8,000 and 10,000 selling square feet. Total square footage reached 37.6 million square feet in January 2012. Store growth has resulted primarily from opening new stores and from the acquisition of Dollar Giant.
Future growth will come from opening into underserved markets, management said. “In addition to new store openings, we plan to continue our store expansion program to increase our net sales per store and take advantage of market opportunities,” management said.
Dollar Tree had approximately 14,170 full-time and 58,600 part-time associates on Jan. 28, 2012.
The company has a market cap of $11.83 billion in a sector, multiline retail, where the average company size is $2.14 billion. Its trailing 12-month P/E ratio is 25.18 and its five-year projected price-to-earnings-growth (PEG) ratio is 1.41, compared to 0.96 for the sector.
Its projected earnings per share growth for the coming year is 14.60 percent, compared to a sector average of 15.90 percent.
Analysts are bullish on Dollar Tree with buy or outperform calls from Raymond James, RBC Capital Markets, Piper Jaffray, Deutsche Bank, Jefferies, JP Morgan and BB&T. Standard & Poor’s rates the stock at underperform.
“Our sell recommendation is based on valuation,” S&P analysts wrote on Feb. 23, a day the stock closed at $88.06, adding, “However, our outlook for the company is positive, given what we see as its attractive value proposition on consumables and seasonal merchandise categories, effective inventory and expense management, and strong cash flow generation.”
Dollar Tree next reports on May 17.
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