Deep discount chain Dollar Tree (NASDAQ:DLTR) will report first-quarter 2007 financial results on Wednesday, May 30. We already know that it exceeded analyst revenue forecasts because management pre-announced sales results earlier this month, but let's see what else we might expect.

What analysts say:

  • Buy, sell, or waffle? Despite the better than expected sales effort, the 17 analysts covering Dollar Tree haven't changed their opinion: 10 say hold and seven rate it a buy.
  • Revenues. As mentioned, Dollar Tree found that money was growing on trees this quarter. Where analysts expected 10% growth to $948 million, the variety store chain picked up extra sales like leaves falling from a tree to $975 million, or a 13% increase over last year.
  • Earnings. Profits were not covered in the announcement and analysts are expecting a 16% increase to $0.36 per share.

What management says:
Strong Valentine's Day sales and an earlier Easter selling season helped Dollar Tree generate stronger sales. Same-store sales, a key retail metric that measures sales at stores open for at least a year, rose more than 5% in the quarter. What's even more impressive, is that was on top of a 4% increase last year. President and CEO Bob Sasser noted that while Dollar Tree was "challenged by an earlier Easter selling season, our comparable-store sales momentum continued to build in the first quarter." What investors will have to watch for is whether profit margins continue to be squeezed by the expansion of the freezers and coolers installed in its stores, which drive lower-margin consumables purchases.

What management does:
The dollar store got a reprieve with margin compression last quarter because of the Christmas selling season. We'll see if additional seasonal purchases this quarter can counteract the dent the consumables have had on margins.

The availability of these consumables helps bring more customers into stores. And more stores -- it opened 60 stores (net) in the quarter and now has more than 3,200 in operation -- means more sales. It's still the margin leader when compared to rivals like Family Dollar (NYSE:FDO) and Big Lots (NYSE:BIG) but the gap is narrowing.

Margin

01/06

04/06

07/06

10/06

02/07

Gross

34.5%

34.4%

34.2%

34.0%

34.2%

Operating

8.4%

8.3%

8.1%

8.0%

8.0%

Net

5.1%

5.1%

5.0%

4.9%

4.8%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
There's a certain sameness walking into a dollar store, whether you're in a Dollar Tree, a Dollar General (NYSE:DG), or a local mom-and-pop store. Aisle upon aisle of tightly packed rows of ... stuff. The introduction of consumable items is a worthy effort by Dollar Tree to build on the success that Big Lots, Dollar General, and the other dollar stores have enjoyed to break that mold of sameness.

While Dollar General is being bought out at a pretty steep premium, Dollar Tree currently trades right in line with the rest of the industry at around 18 times normalized earnings and eight times EBITDA (earnings before interest, taxes, depreciation, and amortization). As well as Dollar Tree and the other dollar stores have been performing, there seems little reason to believe that their valuations will suddenly rise to match the premiums being offered by KKR for the General. At these levels, Dollar Tree's stock seems fairly priced.

Dollar Tree has earned a four-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the stock-rating service by joining today. It's free!

Family Dollar is a recommendation of Motley Fool Stock Advisor, where there's no discounting the fact that the newsletter is beating the market by about 40 percentage points. A 30-day guest pass gives you full access to the service to see why.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.