Being in the business of selling everyday merchandise for $1, Dollar Tree (Nasdaq:DLTR) has enjoyed a period of prosperity over the past couple of years when most everyone else was struggling to hang on. The good times kept on, at least in the second quarter for Dollar Tree. Consolidated net sales for the second quarter were $1.38 billion, a 12.7% increase compared to $1.22 billion reported for the 2009 comparable quarter. Comparable store sales increased 6.7%, on top of a 6.8% increase for the second quarter 2009. Earnings per diluted share for the second quarter were 61 cents, an increase of 45% compared to the 42 cents in the year ago quarter.
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Will the Good Times Keep Coming?
When and how strong this economy recovers, it's likely that the recession has led to some permanent changes in consumption habits for many Americans. Indeed, as a group, ultra discount retailers like Big Lots (NYSE:BIG), Family Dollar (NYSE:FDO) and TJX (NYSE:TJX) have all continued to grow sales and profits while the economy contracted. They will likely benefit from a more frugal consumer for years to come. Yet most of the good times for share price performance may be nearing an end.
Markets are forward looking creatures and they have clearly anticipated the strong performance from these ultra discount retailers. Dollar Tree trades at $44 a share, 18 times earnings and near its 52-week high. Looking at the share prices of Family Dollar, Big Lots and the like shows that they all are trading near these levels. (For more, see Analyzing Retail Stocks)
Great Expectations
As dollar store and other discount retailers continued to benefit from a more frugal consumers, market expectations became elevated with each passing quarter. Yet even the best of companies can not continue to exceed its previous growth forever. Indeed for the third quarter, the company estimates sales to be in the range of $1.35 billion to $1.39 billion, based on low to mid single digit positive comparable store sales. Diluted earnings per share are estimated to be in the range of 57 cents to 62 cents. That's still an impressive showing but it appears to be slowing from the second quarter growth rates. With expectations still strong, even a solid quarter may not be enough.
Price versus Value
The quality of Dollar Tree as a business is not the problem. It's a great business. Yet at the current share price, the investment might not be as great. (For more, check out The Industry Handbook: The Retailing Industry.)
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