This Market Darling Is Starting to Slow Down

With the economy starting to improve, you might think Dollar Tree's (NASDAQ: DLTR  ) fortunes will reverse. The deep discounter provided unemployed and lower-income consumers a safe place in the storm, but with the economic weather clearing up, it would be reasonable to expect consumers to venture out again to higher-end retailers. However, that assumption would be wrong.

Dollar Tree recently announced record first-quarter earnings, with total sales up 8% and comparable-store sales up 2.1%, crushing the likes of big-box retailers like Safeway (NYSE: SWY  ) and Wal-Mart (NYSE: WMT  ) , which only reported a change in comparable-store sales of 1.5% and negative 1.2%, respectively.

Part of the reason behind Dollar Tree's record profits is that the company reached a record operating margin of 11.6%. Despite Dollar Tree's deep-discount business model, this margin is far higher than Safeway's, and is almost double that of even a premium-priced grocer like Whole Foods (NASDAQ: WFM  ) .

However, while Dollar Tree may have higher margins than Whole Foods, its sales growth is starting to lag. It's certainly beating low-cost competitors, but the bifurcating phenomenon seems to be fading. For a time, it seemed that the deep discounters and the high-end retailers were both doing extremely well, as customers either got poorer or richer and the middle thinned out. However, this quarter, Whole Foods reported nearly 7% same-store sales growth, and expects full-year earnings growth of up to 17%, while Dollar Tree issued guidance for just 2.8% growth at the top end of the range -- and the bottom end included the possibility of negative growth.

That may explain why Dollar Tree's stock has faltered over the last year. The company is doing well compared to competitors, but growth is starting to slow down, and the stock isn't particularly cheap. Safeway, for comparison, has had essentially flat sales for the last year, and operating margin was actually down this quarter, but small improvements in interest expenses and taxes have given a boost to net income, which has given encouragement to some investors already enticed by the company's low price-to-earnings ratio. Similarly, Wal-Mart's stock is starting to show some of its best growth in years, presumably because the stock was simply getting too cheap to pass up. It's not as if sales or profits have been improving much.

I continue to think that Dollar Tree is a superior company to its competitors, but as an investor, I would wait for this deep discounter to be on discount itself. In the meantime, add Dollar Tree to My Watchlist to find out if its growth slips any further in the coming quarters.

More Foolish insight from the Fool
It's hard to believe that a grocery store could book investors more than 30 times their initial investment, but that's just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse. In this premium report on the company, we walk through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. So make sure to claim your copy today by clicking here.


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2454902, ~/Articles/ArticleHandler.aspx, 9/18/2014 12:00:19 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement