Is There Any Stopping Dollar Tree?

Shares of Dollar Tree (Nasdaq: DLTR) hit a 52-week high on Friday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
Dollar Tree, along with its discounting peers Family Dollar Stores (NYSE: FDO) and Dollar General (NYSE: DG), is still climbing the mountain higher as slow wage growth, high unemployment levels, and the rising price of consumer goods continues to drive consumers in greater numbers to discount retailers.

The drive to save money is strong and asking consumers to part with their precious discretionary cash isn't as easy as it used to be with a housing bubble still fresh in most people's minds. Since we last looked at Dollar Tree two months ago, the company reported record first-quarter results that highlighted a 5.6% rise in comparable-store sales and a 22% jump in profit. Also, the company accelerated its share repurchase program and forecast low-to-mid-single-digit comparable-store sales growth for the remainder of the year.

As you should know by now, even for discount retailers, challenges still exist. For one, retail discounter Big Lots' (NYSE: BIG) milewide earnings miss may have signified that consumers might be willing to part with more discretionary money than Wall Street had been predicting -- then again, luxury retailers' recent swoon would suggest otherwise. The push-pull between cost-conscious consumers and luxury spenders has yet to be sorted out in its entirety.

Also, competition from the world's largest retailer, Wal-Mart (NYSE: WMT), has the potential to sap discount stores' results. Wal-Mart has its U.S. operations back on track for the first time since 2008, and it's been using its everyday low prices as a way to attract former shoppers and to keep current shoppers in its stores.

How it stacks up
Let's see how Dollar Tree stacks up next to its peers.

DLTR data by YCharts

Even for the underperforming Big Lots, shareholders have been in for a nice ride over the past five years:

Source: Morningstar, author's calculations. CAGR = compound annual growth rate.

With the exception of Big Lots, which has failed multiple times to drive shoppers to return to its stores, all of these discount retailers have become even more expensive since we looked at them two months ago.

Family Dollar offers the slowest revenue growth rate next to Big Lots and is the only discount store here to pay a dividend (1.3%). Of concern, however, is the fact that the magnitude of its earnings beats have slowed and that hedge-fund guru Bill Ackman recently cut back his position in Family Dollar.

Dollar General offers up a much faster growth rate than Family Dollar, but you'll lose your shot at a dividend. That didn't stop investors from boosting the stock higher following a 5.4% rise in comparable-store sales with adjusted EPS up 31%. But, before you get too giddy, keep in mind that the company priced a 30-million-share secondary offering just four days after that report!

Finally, there's Dollar Tree, which has exhibited the quickest growth rate, and now the priciest metrics. What you get with the growth, you give up with its lack of a dividend. The company's comments that growth for the remainder of 2012 will only be in the low-to-mid single digits didn't seem that optimistic -- at least to me.

What's next
Now for the $64,000 question: What's next for Dollar Tree? That answer  is going to depend on whether consumers stick to their frugal spending habits and continue to visit these discount retailers and whether these retailers can navigate a sea of rising commodity prices while both maintaining their margins and keeping their customer base satisfied.

Our very own CAPS community gives the company a four-star rating (out of five), with a healthy 91.5% of members expecting it to outperform. If you recall, when I reviewed Dollar Tree two months ago, I hadn't made a CAPScall, but I saw limited upside left in the stock. Since then, I have made a CAPScall of underperform and am currently underwater by 11 points on that pick; however, I still feel its run is near an end.

Like any other retailer, Dollar Tree has higher-margin items it needs to sell along with staple products in order to grow its bottom line and boost its margins. However, these high-margin discretionary items are susceptible to weakness like those of any other retailer if the U.S. economy weakens (which is possible given the weak jobs report in May). There just isn't nearly enough reward left to justify owning Dollar Tree considering it doesn't pay a dividend, forecasted flat-to-slowing comparable-store sales, is pricier than its peers, and contends with retail king Wal-Mart. It could be a few months, but I expect the tide to change in the discount-store sector.

Even if discount stores aren't the right investment for you, you might be interested in reading about three companies our analysts at Stock Advisor feel will outperform in the emerging markets. Get your copy of this latest free special report by clicking here.

Craving more input on Dollar Tree? Start by adding it to your free and personalized watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.