Dollar Tree's Dilemma

When mutual fund manager Ron Baron discusses a company he likes, I usually pay close attention. His quarterly reports are some of the best reads in the mutual fund business because he details his arguments, which are usually very sound. Dollar Tree Stores (Nasdaq: DLTR  ) has been on his list of holdings for quite some time.

I've also kept my eye on the company, but for some reason it never generated that compelling "buy" signal for me. With the company's latest warning, I think I've figured out why. It's because I hate retail, and I hate dollar-store retail even more because you can only make so much money when everything you sell costs a buck!

Look, if you go by what's on paper, you might say I've got very little to argue against. The company has delivered pretty solid earnings growth over the past several years. Earnings have grown 50% from fiscal 2000 to the present. The stock hasn't done too badly, either, returning about the same over that period.

But you know what? I'm not impressed by a company that increased earnings by 50%, when its store count increased 60% over the same period, while net margins fell from 7.2% to 5.8%. Comp store sales increases? Year over year, they've never been better than 2.9% since 2000, and they were only 0.5% this past year. Yuck.

Oh, heck, maybe I'm just being a spoilsport. It's normal for expanding companies to see a drop in these digits. Plus, plenty of folks have obviously made good money in this sector, in stocks like Dollar General (NYSE: DG  ) , Family Dollar Stores (NYSE: FDO  ) , and 99 Cents Only Stores (NYSE: NDN  ) , but I'm just not wowed by it. Well, actually, I am wowed by one thing: the fact that so many of these stores exist that consolidation might be in the offing. Dollar Tree Stores, with its $3 billion market cap, did have $94 million in free cash flow in the trailing 12-month period, has $49 million more cash than debt, sports a price-to-sales ratio of only 0.85, and has an EV-to-EBITDA ratio of just 6.2. That last number in particular can sometimes be indicative of a company's relative value. A traditional, unwritten rule of thumb says any number under 8.0 is great, though there are certainly exceptions.

Given my other concerns, however, I'd rather spend 25 hard-earned bucks on 25 items in the company's store than on one share of its stock.

Here's more free Foolish writing on the one-buck retail sector:

Fool contributor Lawrence Meyers owns none of the stocks mentioned and is never a day late nor a dollar short.except when paying his bills.

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