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Will Dollar Tree Give You Great Fruits?

September 09, 2014 | About:

The dollar stores are doing well in the prevailing environment since people want to save as much as possible. Further, its cost-cutting techniques and great offers to attract customers make them win in this tough environment. This has made competition tough among all the dollar store operators, wherein each of them tries to outpace the others through higher promotions and discounts.

Dollar Tree (NASDAQ:DLTR) is indeed the best pick of the lot and is really doing well in this space. Its recently reported second-quarter results came in ahead of analysts’ expectations, sending its share price higher.

The details

Revenue for the quarter jumped 9.5% to $2.03 billion over last year. The top line was driven by 90 new stores opened during the quarter as well as same store sales growth of 4.5%. The comparable store metric was ahead of analysts’ expectation of 2.5%. This metric was helped by higher customer traffic at its stores and an increase in the average transaction size of the customers.

Although the overall environment has been weak and some dollar stores such as Family Dollar Stores (FDO) are suffering from lower sales, Dollar Tree has been able to pull the crowd. It has managed to lure people to its stores through its endless strategic efforts. Its multi price point chain, omni-channel growth, store expansion and revamp of the formats have been some of the primary reasons for its success. It offers most of the products for $1 or less, which particularly attracts the cost-conscious customers.

However, its gross margin took a hit because of its low price strategy and higher costs related to high value products. Gross margin shrunk to 34.2% from 35% in the previous year’s quarter. Nonetheless, the company managed to register an increase in its bottom line. Earnings surged 5.4% to $0.59 per share. If we exclude the acquisition related costs, adjusted earnings came in at $0.61 per share. Therefore, this retailer is doing a commendable job of controlling its costs.

Against the peers

Dollar Tree is also doing well when compared to its toughest rival Dollar General (NYSE:DG). Dollar General’s strategic move of selling tobacco was a game changer. It helped in attracting more customers, though it affected the margins. In fact, Dollar General has been a better performer as clearly evident from its stock price movement. In the last one year, Dollar General’s share price has increased by 5.3% whereas Dollar Tree’s stock price has decreased by 5.2%.

Further, both the companies are eyeing at Family Dollar for a potential merger, in order to strengthen its presence. This merger will be a major boost for the acquirer. It will be interesting to see what happens next.

My takeaway

Although Dollar General has been a strong competition for Dollar Tree, the latter is making a number of moves to overcome the competitive pressure. It has been expanding its store presence, formatting its stores and is moving into new markets. Also, its efforts at controlling costs and managing its productivity are something to be looked forward to. Moreover, Christmas season has an extra day this time, which should help in boosting sales. Therefore, these factors, coupled with a bright outlook make the dollar store an interesting pick for the future.

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