Dollar stores have always been popular among consumers looking for serious discounts on products. But did you know this type of store has also become the fastest-growing food retailer in the contiguous United States (all states besides Alaska and Hawaii)? And this category of stores has collectively doubled its store presence in the rural U.S. in the last 10 years.
Among this subindustry of retail, Dollar Tree (DLTR -1.23%) is a major player, alongside Dollar General. But can the former stock continue to enrich growth investors? Let's dive into Dollar Tree's fundamentals and valuation to decide.
Dollar Tree's growth prospects remain intact
Operating over 16,400 Dollar Tree and Family Dollar stores throughout Canada and the U.S., Dollar Tree's $30 billion market capitalization is second only to Dollar General's $45 billion market cap. Like its larger peer, the Virginia-based retailer achieved this stratospheric level of success by offering well-known and trusted name brands at very affordable price points.
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Same-store sales growth rate | 4.4% | 4.8% |
| Total store count | 16,162 | 16,419 |
| Net margin | 7.8% | 4.5% |
Data source: Dollar Tree.
Dollar Tree's consolidated net sales increased by 6.1% over the year-ago period to $7.3 billion in the fiscal first quarter (ended April 29). So, what factors produced this solid top-line growth rate? In recent quarters, above-average inflation attracted more value-oriented foot traffic into its stores. This uptick in traffic was largely what fueled the company's net sales growth. Dollar Tree's steady expansion of its store footprint also played a lesser role in its growth: The company opened 107 new stores and relocated 33 stores for the quarter. Compared to just 29 stores that it closed, this shows that there is still plenty of room for its network of stores to expand in the future.
Dollar Tree's non-GAAP (adjusted) diluted earnings per share (EPS) plunged 38% year over year in the fiscal first quarter to $1.47. The company's cost of sales and selling, general, and administrative expense categories both rose at double-digit percentage clips during the quarter and outpaced consolidated net sales growth. This explains the significant contraction in non-GAAP net margin for the quarter, which was unable to be fully offset by a reduced share count. That is why Dollar Tree's adjusted diluted EPS fell while consolidated net sales increased in the quarter.
Dollar Tree expanded 408 of its stores into its multi-price Plus stores during the fiscal first quarter. As the company builds on its store count and rolls out $3 to $5-plus merchandise to more of its existing stores, this should lead to strong growth on the horizon. That's why analysts believe the company's adjusted diluted EPS will compound at 13.3% annually over the next five years, which is twice the discount stores industry average annual earnings growth forecast of 5.9%.
Image source: Getty Images.
A robust balance sheet
Dollar Tree should have the financial flexibility to execute its growth plans: It is projected that the company's net debt will clock in at $3.1 billion for the fiscal year set to end next January. Stacked against the $2.7 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) that is expected this fiscal year, that equates to a manageable net-debt-to-EBITDA ratio of 1.1. Simply put, Dollar Tree could completely retire its debt in just over a year if it thought that was the best course of action for shareholders.
The stock's valuation is a bargain
Investors seem to like what this defensive business is doing as Dollar Tree share prices are up 7% in the past 12 months. And yet the stock arguably remains a compelling value at the current $142 share price. This is because Dollar Tree's forward price-to-earnings (P/E) ratio of 19.2 is moderately below the discount stores industry's average forward P/E ratio of 21.8. Pairing this below-average valuation with an above-average growth profile gives Dollar Tree a high chance of delivering healthy returns to shareholders in the years ahead, making it a buy for growth investors.
