With Record Sales, Will Dollar Tree Stock See New Highs?

Source: Thinkstock

Source: Thinkstock

Dollar Tree (NASDAQ:DLTR) is massive retailer specializing in the operation of stores that sells everything for a dollar or less. Yes, this discount bargain basement priced company is indeed a Fortune 500 Company. It operates approximately 5,080 stores in forty-eight states and five Canadian Provinces as of May 3, with total retail selling square footage of 44.0 million. The stock has been a boon for shareholders, returning over 300 percent in the last four years. Today, shares are rocketing higher. An investigation into the recent performance provides evidence as to why traders are piling back into this stock.

Dollar Tree’s consolidated net sales for the first quarter were a record $2.00 billion, a 7.2 percent increase compared to $1.87 billion reported for the quarter ended May 4, 2013. Consolidated comparable store sales increased 2 percent on a constant currency basis. Adjusted for the impact of Canadian currency fluctuations, the comparable-store sales increase was 1.9 percent. After operating expensed earnings per diluted share for the first quarter were $0.67, a 13.6 percent increase compared to earnings per diluted share of $0.59 reported for the first quarter 2013. Cash and cash equivalents at quarter-end totaled $387.1 million, compared with $383.3 million at the end of the first quarter 2013.

During the past four quarters, the company has invested more than $1 billion for share repurchases, primarily through a $1 billion accelerated share repurchase program (ASR) entered into in September 2013. The company received 1.9 million shares under the ASR in the first quarter of 2014. Subsequent to the end of the first quarter, on May 15, the company received an additional 1.2 million shares, completing the ASR. Altogether, the company received a total of 18.1 million shares under the $1.0 billion ASR. The company has $1 billion remaining on its share repurchase authorization. Showing further signs of strength,the company continues to expand. During the first quarter, Dollar Tree opened ninety-four stores, closed six failing stores, and expanded or relocated twenty-eight stores. Retail selling square footage increased 6.8 percent compared to a year ago, to 44.0 million square feet.

CEO Bob Lasser stated, “Our first quarter sales grew as the result of increases in both traffic and average ticket with our discretionary business growing slightly faster than consumables. Leading categories during the quarter included candy, check-out products, stationery and seasonal merchandise for Valentines and Easter. Our stores are currently filled with a balanced mix of consumable products and exciting variety merchandise for Summer Fun. Inventory is clean and fresh and our associates are focused on providing a great shopping experience for every customer, at every store, every day.”

Looking ahead the company estimates sales for the second quarter of 2014 to be in the range of $1.97 billion to $2.02 billion, based on low-single digit positive comparable store sales. Diluted earnings per share are estimated to be in the range of $0.58 to $0.64. Dollar Tree slightly revised its guidance a little higher. The company now sees full year sales in the range of $8.37 billion to $8.54 billion. This estimate is also based on a range of low-single digit positive comparable store sales. Fiscal year 2014 diluted earnings per share are expected to be $2.94 to $3.12. These estimates assume no impact from potential additional share repurchase activity in 2014. Factoring that in, I would expect to see earnings approach $3.20 for the year.

In summation, Dollar Tree is firing on all cylinders. It has delivered a record quarter for sales and have guided their estimates higher for fiscal year 2014.With the stock trading at $54, it is still at a reasonable twenty price to earnings multiple. I would like to see the stock come back a little before recommending a position, but I see the stock moving substantially higher. I also would like to see the company pay a dividend in the future once its share repurchase program is complete.

Disclosure: Christopher F. Davis holds no position in Dollar Tree. He has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $63 price target.

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