The Key to Dollar Tree's Big Bounce

On Thursday, Dollar Tree (DLTR 3.81%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

The dollar-store concept really caught fire during the 2008 recession, and ever since, Dollar Tree and its peers have tried to cash in on the lucrative market niche. But competition has gotten fiercer, forcing companies to take extraordinary measures to foster further growth. Let's take an early look at what's been happening with Dollar Tree over the past quarter and what we're likely to see in its quarterly report.

Stats on Dollar Tree

Source: Yahoo! Finance.

What's in store for Dollar Tree this quarter?
Analysts have reined in their expectations for Dollar Tree slightly over the past few months, cutting their estimates for the just-ended quarter by a penny per share and cutting $0.02 per share from their full-year consensus figures. But the stock has rebounded sharply from late-2012 declines, gaining nearly 24% since mid-February.

Most of the share-price gains for Dollar Tree came at the end of February, when the retailer announced its results for the previous quarter. With gains in same-store sales of 2.4% and an expansion in operating margins, Dollar Tree inspired investors to believe in the company's ability to keep costs down rather than growing without regard for the impact on net income, even though its earnings guidance for the coming year was below what analysts had expected to see.

But increasingly, the industry has had to make big investments in order to seek out profitable growth opportunities. Family Dollar (FDO +0.00%) reported fairly strong results early last month, with healthy gains in earnings and comps as well as substantial revenue gains from new-store openings despite also seeing some margin compression. Yet Family Dollar has also gone through an extensive overhaul of its stores, with plans to improve 850 of its stores by fiscal-year end in an effort to make its locations more attractive. Similarly, Dollar General (DG 3.02%) posted record results back in March and expects to hire 10,000 new employees this month as it too has turned to aggressive expansion plans to try to increase its reach across the nation. Dollar Tree will have to answer that call with strategic moves of its own in order to keep up with its rivals.

The big question for Dollar Tree and the rest of the deep-discount industry is whether it can continue to beat out traditional discounters like Wal-Mart. The companies did a great job of undercutting Wal-Mart in the last recession, but if the economy starts to slip again, you can expect more of a fight from Wal-Mart and similar discount retailers to retain more of their business.

In Dollar Tree's earnings, look to compare both results and strategic visions against those of its competitors. Unless Dollar Tree makes extensive efforts to advance its own growth, it could easily fall behind rivals that haven't hesitated to innovate recently, and that could send its share price back downward.

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