With the S&P 500 down 17% year to date, 2022 hasn't been kind to stock market investors. But not every company has been hurt by the bear market. Discount retailer Dollar Tree (DLTR -0.14%) has seen its share price jump 17% in the same period. Let's discuss three reasons why it can continue outperforming.
A recession-proof business
According to a Bloomberg survey of economists in October, 60% believe the U.S. economy will enter a recession within 12 months. An economic downturn could be catastrophic for many retail companies because less consumer spending means fewer sales and profits. Dollar Tree bucks the trend. As a dollar store, its business model focuses on getting prices as low as possible.
It pulls off its strategy through a no-frills shopping experience, low labor costs, and by locating its stores in underserved (mainly rural) communities where space and labor are cheaper.
That said, Dollar Tree is not completely immune from macroeconomic challenges like inflation (which stands at 7.7% annually as of October). The company is dealing with this headwind by raising its standard price; it went from $1 to $1.25 in late 2021. But as a deep-discount store, Dollar Tree is naturally better-suited to handle this challenge than its big-box retailer rivals (such as Walmart and Target) because dollar stores are typically the cheapest option for consumers when money is tight.
Business is booming
Dollar Tree's business is holding up well in this challenging economy. Second-quarter net sales jumped 6.7% year over year to $6.77 billion as inflation drives consumers to its low-priced goods. Inflation is a double-edged sword because it increases freight costs and changes the company's product mix in favor of lower-margin consumable products. But so far, Dollar Tree has shrugged off these headwinds -- with its gross margin actually improving from 29.4% to 31.4% in the period.
To keep powering growth, Dollar Tree continues to expand its store count, opening 127 new locations to bring its total to 16,231 in the period. The company also rolled out its new "Plus" offering to 697 more stores. Dollar Tree Plus offers higher-priced items of $3 and $5, which can expand selection and help boost same-store sales going forward.
Image source: Getty Images.
Dollar Tree is also a cash cow. Second-quarter net income soared by 27.4% to $359.9 million, and management expects earnings per share to be between $7.10 and $7.40 for all of 2022 (an increase of 25% over the prior year at the midpoint).
The company returns value to shareholders through a generous buyback program, which retired 250 million worth of shares in the first half of 2022 with an additional $2.25 billion authorized for repurchase in the future. Buybacks can benefit investors by increasing the fundamental value of their shares relative to earnings and cash flow.
A good valuation
Despite its strong performance in 2022, Dollar Tree is still reasonably valued compared to the wider market. With a forward price-to-earnings multiple of 18.9, Dollar Tree trades lower than the S&P 500 average of 19.4. With strong bottom-line growth and a recession-resistant business model, the stock looks like a no-brainer buy at these prices.
