Discount retailer Dollar Tree (NASDAQ: DLTR ) has been impressive this year, as robust strategies and terrific execution have helped it outperform its peers. However, there was a blemish in the recently reported second-quarter results, as Dollar Tree failed to meet analysts' estimates by a whisker and issued a light guidance .
But shares rose 2.5% after the report, which probably indicates that investors have faith in the company's long-term prospects, which is why there was no panic selling. Going forward, Dollar Tree's strategies further indicate that the company is moving in the right direction, and shareholders should stick with it for the following reasons.
Better than peers
Dollar Tree's same-store sale growth has outperformed peers Dollar General (NYSE: DG ) and Family Dollar (UNKNOWN: FDO.DL ) this year, and the story continued in the latest round of results. While Dollar Tree's comps grew 3.7% in the recent quarter, Dollar General had witnessed 2.6% growth, and Family Dollar was at 2.9% .
While there might not be a big disparity in same-store sale growth, a look at the following chart will reveal the true picture.
Dollar Tree's gross margin has held its own, while others have witnessed a decline. The reason behind this is pretty simple. Both Dollar General and Family Dollar are focused on driving more traffic to their stores by selling more consumables. They are focusing on tobacco and other low-margin products to increase revenue.
Family Dollar's sales had increased 9% in the previous quarter, and Dollar General clocked sales growth of 8.5%. In comparison, Dollar Tree's top line grew 8.8% in the previous quarter -- impressive without selling tobacco.
However, sales of lower margin products are adversely affecting the bottom line, as the chart above shows. Family Dollar's net income was down 3% in the previous quarter, while Dollar General has made it a habit of cutting down its guidance this year. Dollar Tree hasn't followed suit, and management remains against selling tobacco products.
Earlier this year, CEO Bob Sasser said the following about selling tobacco, "It's bad for you, and also bad for our margins." Instead of taking the easy route to grow sales, Dollar Tree has other strategies that look good.
Dollar Tree is the smallest of the lot in terms of store count with 4,842 stores . Family Dollar has more than 7,600 stores, while Dollar General's count exceeds 10,000 . This indicates that Dollar Tree has a lot of room to expand its business, and management believes that there's potential for 7,000 stores in the U.S. In addition, Dollar Tree sees potential for 1,000 stores in Canada--way greater than the 160 stores at present .
The company is not just focused on increasing its store count; it is also focused on opening more productive stores. In 2012, Dollar Tree's new store productivity was the highest since 2001, and in 2013 the company is witnessing a similar performance so far .
Dollar Tree has been trying to drive impulse sales by refreshing merchandise around checkout lanes, along with cross-merchandising and suggestive selling by store staff.
In addition, Dollar Tree is aggressively installing coolers and freezers in stores. Almost 3,000 stores now provide frozen and refrigerated products, and the company intends to cover 550 stores this year, out of which 444 stores have already been covered. Management is of the opinion that frozen and refrigerated products lead to increased traffic, and drive sales across all categories, which includes higher-margin items as well .
Dollar Tree, with a trailing P/E of 18.6, is slightly cheaper than Dollar General (P/E of 18.66) and Family Dollar (P/E of 19.6). However, according to Yahoo! Finance, the expected annual earnings growth rate for the next five years is highest for Dollar Tree at 17%. Dollar General's earnings are expected to grow 15% annually over the next five years, while Family Dollar's estimate sits at 11% .
Hence, considering the valuation, expected earnings growth, and Dollar Tree's ideology of growing in a profitable manner and not just focusing on quantity, it seems to be the best pick among the dollar stores.
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