Dollar Tree Just Hit a 52-Week High: How High Can It Fly?

Shares of Dollar Tree (Nasdaq: DLTR  ) hit a 52-week high today. Let's look at how the company got here and see whether clear skies remain in the forecast.

How it got here
Dollar Tree, along with Dollar General (NYSE: DG  ) and Family Dollar Stores (NYSE: FDO  ) , have collectively benefitted since the recession from more price-conscious consumers. These stores generally offer items for $1 or less, which is music to the ears of consumers who are working with far less extra cash than they were five years ago.

Dollar Tree has been buoying the nearly perfect uptrend in its stock with impressive growth figures. For fiscal 2011, the company's same-store sales grew by 6%, with EPS jumping 30%. More importantly, Dollar Tree's guidance remains strong, with the company forecasting a 7.2% increase in sales per square foot -- a true measure of efficiency in the retail world.

How it stacks up
Let's see how Dollar Tree stacks up next to its peers.

DLTR Chart

DLTR data by YCharts

There aren't too many complaints to go around in this sector -- the effect of a price-conscious consumer in action.

Company

Price/ Book

Price/ Cash Flow

Forward P/E

5-Year CAGR

Dollar Tree 8.3 17 17.2 10.8%
Dollar General 3.3 15.2 14.3 10%
Family Dollar 6.2 14.9 15.3 6%
Big Lots 3.6 9.9 11.4 1.9%
Wal-Mart (NYSE: WMT  ) 2.9 8.6 11.3 5.1%

Sources: Morningstar, author's calculations, CAGR = compound annual growth rate.

Here you can see exactly what sort of premium is being placed on a faster growth rate with Dollar Tree, as the company trades at a pricey 8 times book value and 17 times cash flow. On the other end of the spectrum, considerably larger and more diversified discount retailers Big Lots and Wal-Mart boast slower five-year growth rates but are considerably cheaper on a cash flow basis. These two companies also offer more downside protection in case consumers begin to tire of their frugal spending habits and once again begin making larger discretionary purchases. One extra selling point for Family Dollar and Wal-Mart is that they both pay a dividend, unlike the other three.

What's next
Now for the real question: What's next for Dollar Tree? That question really depends on whether, as I mentioned, consumers continue to be frugal about their spending habits or if they decide they're tired of putting off larger discretionary purchases. Recent sales growth in brand-name clothing merchandise signals that we could be close to an inflection point.

Our very own CAPS community gives the company a four-star rating (out of five), with 92% of members expecting it to outperform. Although I haven't made a CAPScall either way on Dollar Tree, I'm beginning to grow very skeptical of whether this run can continue. Strength in casual dining and brand-name merchandise indicates to me that consumers are indeed spending more than in the past, which could mean bad news for discount dollar stores like Dollar Tree. Last June, Dollar General missed Wall Street estimates, and in January, Family Dollar did the same, as both companies struggled to keep costs down as input costs rose -- could this be Dollar Tree's fate? It's possible, and for the reasons given I don't think it will head much higher.

Craving more input on Dollar Tree? Start by adding it to your free and personalized Watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley fool owns shares of Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart, as well as creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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