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Mark Yu
Mark Yu
Articles (397)  | Author's Website |

Is There an Opportunity in Dollar Tree’s Shares?

The discount store suffers a price drop

September 09, 2016 | About:

Dollar Tree (NASDAQ:DLTRreported its second quarter results – 66% sales growth to $4.99 billion and an outstanding comeback in its profits from -$44 million in the same period last year to $170 Mil this year – in late August. As a result, Dollar Tree’s shares ended up -9.9% at market close.

(Dollar Tree, Annual Filing)

Quite troubling to figure out how the market depreciated Dollar Tree’s shares despite its good quarterly figures as the broader Standard & Poor's 500 closed just -0.14% that day. One factor, as it was for its peer Dollar General (NYSE:DG), is Dollar Tree's reduced performance in its same-store sales.

Dollar Tree same-store sales (comparable store net sales) compares net sales for stores open before December of the year prior to the two years being compared, including expanded stores. The comparable store net sales calculation only includes our Dollar Tree stores. Net sales per store and net sales per selling square foot are calculated for stores open throughout the period presented.

Investopedia defined this metric this way: Comparable store sales refer to the amount of revenue a retail location generated in the most recent accounting period, relative to the amount of revenue it generated in a similar period in the past. Further, by comparing sales across different periods, company management and investors can determine how well a retail store is doing. Comparable store sales not only provide a picture of how specific locations are performing, they can also tell a story about how a retailer is performing, on the whole.

(Read more: Comparable Store Sales Definition | Investopedia)

(Read more: Time to Buy Dollar General?)

Dollar Tree reported a 1.2% same-store sales growth for the quarter,  slower growth compared to its 2.7% growth in the same period last year and also to its previous quarter.

(Same-Store Sales Growth, Dollar Tree Quarterly Filings)

Other than this reduced same-store sales figure in its quarterly earnings report, Dollar Tree also lowered its overall sales for fiscal year 2016 but raised its profits outlook. The retailer now expects a $20.69 billion to $20.87 billion sales and a diluted earnings per share (EPS) in range between $3.67 and $3.82. Dollar Tree initially expected net sales range between $20.79 billion to $21.08 billion and diluted EPS between the range of $3.58 to $3.80.

In my calculations, this outlook would indicate that Dollar Tree is expecting to have a year-on-year growth of 34% in its sales and 197% in its diluted EPS.

"I am very pleased with the company's overall performance in our second quarter. Through what continues to be a challenging retail sales environment, we delivered gross margin improvement and managed expenses effectively to deliver earnings at the top end of our guidance range. In our Dollar Tree segment, we improved our operating margin and delivered our 34th consecutive quarter of positive same-store sales.

"Just over a year ago, we completed our acquisition of Family Dollar (FDO) and our integration continues to progress as planned. The stores are cleaner, the values are greater, and our merchandise assortments are improving. Additionally, we are taking the necessary steps to develop our shared services support model and are continuing our focus on cost-related synergy capture. As a combined organization, we are well-positioned to better serve more customers, generate significant cash flows and deliver long-term value to our shareholders.” – Bob Sasser, Dollar Tree CEO, on recent quarter earnings

(Dollar Tree Stores and Distribution Centers, Cut and Paste from Annual Filing)

Dollar Tree

In its annual filing, Dollar Tree claimed to be a leading operator of discount variety stores. As of July 30, Dollar Tree had a total store count of 14,129 stores nationwide of which 56%, 7,945 stores, are under Family Dollar Stores. Dollar Tree also closed 4% of Family Dollar stores in comparison to the same period last year but grew its namesake stores by 10%.

(Family Dollar, Image Source)

In July 2015, Dollar Tree’s acquisition of Family Dollar was approved the Federal Trade Commission. The deal was worth nearly $9 billion according to the Wall Street Journal. Dollar Tree’s total debt increased by 976% to $7.35 billion in fiscal year 2015.

According to the retailer, the Dollar Tree and Family Dollar banners have complementary business models. Everything is $1.00 at Dollar Tree while Family Dollar is a neighborhood variety store offering merchandise largely for $10 or less. As a result of the acquisition, Dollar Tree would be reporting two business segments: Family Dollar and Dollar Tree.

(Dollar Tree, Image Source)

Operating margin

In 2015, Dollar Tree delivered an operating margin of 6.8%. The figure was quite a low in its three-year (fiscal year 2013 to fiscal year 2015) average of 12.3%. Nonetheless, CEO Bob Sasser could not be more satisfied as Dollar Tree’s business operations improved its margins in the recent quarter.

(Dollar Tree Operating Margins, Annual and Quarterly Filings)

Sales and profits

As of first half of 2016, Dollar Tree’s unaudited financial statement revealed that it had grown its sales by 94% to $10 billion and profits by $402.8 million from -$28.5 million in the same period last year. Dollar Tree had to include its merger expenses in its performance in the second quarter last year therefore resulting in poor numbers.

(Dollar Tree, Annual Filing)

Cash, debt and book value

As of July, Dollar Tree had total cash of $1.09 billion. The company also had a total debt of $7.3 billion giving it a debt-equity ratio of 1.5 times. Dollar Tree also had 49.78% of its assets in goodwill having a book value of $4.86 billion.

Cash flow

(Dollar Tree Cash Flow, Annual Filing)

In fiscal year 2015, Dollar Tree delivered -15.74% growth in its cash flow from operations brought primarily by its recent acquisition activity. The retailer allocated $480.5 million in capital expenditures and $6.53 billion in its Family Dollar acquisition.

The major acquisition made Dollar Tree take much of the $12.1 billion debt that year. The discount store operator also reduced its debt by $5.9 billion in the fiscal year. As observed, Dollar Tree has yet to perform any share buybacks since fiscal year 2013. Also, the company had not provided any dividends for the past decade.

Valuations

According to GuruFocus data, Dollar Tree had a price-earnings (P/E) ratio of 27 times (industry median of 20), price-book (P/B) ratio of 4 times (industry median of 1.7) and price-sales (P/S) ratio of 1 (industry median of 0.44).

Graham Number calculation also provided an intrinsic value of $38 a share, indicating that the current share price is significantly overvalued.

(Read more: Graham Number)

Market return performance

Despite not providing dividends, nor share buybacks in recent years, Dollar Tree provided an average annual total return of 27.98% since 2010. Meanwhile, the broader S&P 500 had given 12.49%.

Conclusion

Despite the market price depreciation recently, Dollar Tree’s current valuations still do not indicate that the retailer is selling at a discount compared to its peers. As can be further observed, the company is focused on growing its business rather than allocating its cash to its shareholders as dividends and share repurchases.

For conservative and dividend investors, though, none of the valuation indicated above support the possible purchase of Dollar Tree shares in this time period.

With an ongoing -12.5% dip in its share price post earnings announcement, it may be a good time for speculative investors to get it and wait for the market to appreciate Dollar Tree’s shares again. Dollar Tree also seemed to demonstrate a quick pivot in its margins after absorbing Family Dollar’s operations just last year, which means it can further achieve growth once it gathers more sales in its thrifty spenders.

I initiated a long position in the retailer with a target price of $98 a share. This value came from a 40 times price-to-trailing 12 month earnings accompanied by a 20% margin safety.

Disclosure: I am long Dollar Tree.

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About the author:

Mark Yu
A doctor in physical therapy (DPT) with a passion for finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

Attempts to dissect company filings per day. Dislikes goodwill and intangible assets.

For quicker reading--jump ahead to an article's conclusion.

One company (review) a day keeps the speculation (hopefully) away.

Would typically invest $500 to $3000 of own money per buy recommendation.

"The only source of knowledge is experience"

"I have no special talent. I am only passionately curious." Albert Einstein

"To strive, to seek, to find, and not to yield." Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." Warren Buffett

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