Dollar Tree (DLTR, Financial) is a good company with sound fundamentals. Although its results in the recent quarter were above Street expectations, the company failed to provide a bright outlook regarding its prospects. Consequently, its stock price slumped, which is a good opportunity for value investors. Let us take a closer look at the company’s performance and its prospects.
The performance
Dollar Tree’s revenue for the quarter rose 11.5% to $1.72 billion, which was above analysts' estimates of $1.69 billion. Its earnings increased 15% as compared to last year. However, a weak guidance from management caused its share prices to slide around 6% in the extended trading session. As already mentioned, the decline in prices is a good sign for investors because after the stock has corrected itself, it will again start its rally.
Dollar Tree operates a chain of more than 4,000 stores across 48 states in the U.S. and another 100 stores in Canada. As the company’s name suggests, its merchandise are sold for cheap prices. Its product category ranges from consumables to personal care products. The list does not end there, but it has many more products to offer. Thus, consumers visit these stores with the expectation of a reasonably priced product, irrespective of the economic performance. Consequently, its same store sales soared around 5.6% on a year over year basis.
Dollar Tree provides value to its customers by providing items of basic use and other seasonal products for $1 or less. And the company is focused to deliver the same value to a bigger customer base. Keeping this in mind, it has opened 110 new stores in the quarter and perked up another 44 stores. It has grown its square foot area by 7% as compared to last year and ended the quarter with a total of 4,451 stores.
Expansion plans
In addition to this, it has plans to add another 315 stores to its fleet by the end of this year. And these new openings will span across the U.S and Canada along with relocating or expanding another 75 stores. The company has also plans to scale up its Canadian stores to the level of its peers in the U.S. and improve their output.
The U.S and the Canadian market is a huge potential for Dollar Tree. According to management, the company is currently running its stores at only one tenth of its total potential in Canada. Management believes that Canada can hold around 1,000 such stores, whereas at present, it has only 107 stores. Similarly, in the U.S., the store count can be scaled up to 7,000, but at present, it has only 4,300 stores. These expansion plans point out that the company has bright prospects.
Dollar Tree has considerably grown its online business, which again depicts its strong growth momentum. The company has one more channel to sell its products by the name Dollar Tree Direct. This allows the company to enhance its reach without building a store. Dollar Tree Direct currently offers more than 2,500 items and site traffic increased 19% from last year on Dollar Tree’s online stores.
These strategies points out to a positive future for the retailer, and the current sell off should not disappoint investors. Instead, this is a buying opportunity. Discount retailer stores perform well even during recession. Dollar Tree has beaten the S&P 500 so far along with its peers such as Dollar General and Family Dollar, which have also outperformed the index.
Conclusion
However, after Dollar Tree reported a weak guidance, investors went into panic selling mode. This declining trend was seen in the entire industry including both Dollar General and Family Dollar. But we have seen a number of reasons to hold onto Dollar Tree. The company’s expansion plans are perfectly on track, which will deliver more growth to both consumers and investors in future.
