Shares of discount store chain Dollar Tree Inc. (DLTR, Financial) fell by more than 7% on Thursday following the release of its latest quarterly results. The decline in the stock price occurred despite the company posting revenue and earnings that beat analysts' expectations.
The company's shares had gained nearly 60% between March 18 and Aug. 26 before today's pullback. It is now up just 2.5% this year, which is an underperformance compared to the S&P 500 Index, which is currently up 7.86%.
Dollar Tree has maintained a stellar performance over the last six months, but still refused to issue guidance for the coming quarter and the full-year results amid pandemic-related uncertainties. The company still plans to open 500 new stores this year, including 325 Dollar Tree stores and 175 Family Dollar stores.
Highlights from recent quarterly results
Dollar Tree posted earnings of $1.10 per share, up 44.7% year over year, which beat analysts' expectations of 89 cents.
Net sales increased 9.4% to $6.28 billion, up from $5.74 billion in the same quarter a year ago.
Overall, the company posted enterprise same-store sales growth of 7.2%, boosted by Family Dollar's growth of 11.6%. Dollar Tree posted an equivalent growth of 3.1%.
Revenue for the six months came in at $12.56 billion, up 8.8% from $11.55 billion posted in the same period last year. This yielded a net income of $509 million, or $2.14 per share, which was up 13.8% year over year.
The company's performance for the quarter looks steady amid the pandemic, but the failure to issue guidance may have affected the post-earnings performance.
Valuation
From a valuation perspective, Dollar Tree is trading at a price-earnings ratio of about 28, which is slightly higher than its closest peer, Dollar General Inc. (DG, Financial) at 26. The Tennessee-based discount store chain also beat analyst expectations on earnings before markets opened on Thursday. And unlike Dollar Tree, which is up about 2.5% this year, Dollar General has surged more than 30%.
On the other hand, Big Lots Inc. (BIG, Financial), the smallest of the three discount stores, reports its second-quarter earnings on Aug. 28. Its shares currently trade at a more lucrative valuation multiple of 7.90.
Based on the projected earnings for the five years, Dollar Tree's valuation appears to improve significantly with a better PEG ratio of about 2.04. Dollar General, on the other hand, trades at a PEG ratio of 2.12.
Conclusion
In summary, Dollar Tree's latest pullback appears to have created an opportunity for those targeting long-term investments. In the short term, the stock appears relatively expensive compared to Dollar General, which has gained more than 30% this year.
As such, Dollar Tree's performance after earnings could be a price correction from an industry perspective. But in the long term, the upside potential is better relative to its peers.
Disclosure: No positions in the stocks mentioned.
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