You could take a dollar and a dream and invest it in a lottery ticket, or you can improve your odds significantly and bet on a growing business like Dollar Tree (Nasdaq: DLTR). First-quarter results from the dollar store show why the latter is a better bet.
Sales, as we know from the forecast the company provided earlier this month, grew 13% to $975 million. But profits also increased, beating out analysts' expectations and rising to $0.38 per share. Higher foot traffic and larger average ticket transactions because of Valentine's Day and Easter falling in the quarter powered sales forward. That also allowed margins to reverse the compression they've been witnessing as a result of adding more freezers and refrigerators into the stores to sell more consumables.
With same-store sales rising 5.8% in the quarter -- its fifth-consecutive rise in comps of 4% or better -- it seems Dollar Tree is developing loyal customers who return to its stores time and again knowing they can find what they want.
Yet it's also true that there are only so many one-dollar items you can buy. Dollar Tree's policy has been to avoid higher-ticket items to keep it at that price point. Customers, though, are also looking for deals on closeout items that are higher-priced. Dollar General (NYSE: DG), Big Lots (NYSE: BIG), and Family Dollar (NYSE: FDO) have found by having bigger-ticket items available, they can boost margins.
Last year Dollar Tree acquired the Deal$chain and is using it to introduce those higher-priced, higher-margin items. While the company converted 122 stores to the multiprice point concept and will be rolling out a few more, the process still served as a minor drag on margin rates. Dollar Tree's overall gross margins were flat year over year, while operating margins increase 10 basis points. That's a faster improvement than anticipated and probably had more to do with the seasonal calendar shift. Next quarter, with fuel costs remaining high, you can expect to see lower margins again, although the back half of the year should be flat, according to management.
Regardless of the microevents that might have shaped the quarter, it was still a strong performance. Better-than-expected sales, better margins, high comps, and a new concept to expand sales and margins further ought to make Dollar Tree a better bet any day than a lottery ticket.
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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.
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