How Dollar Tree Hopes to Crush Family Dollar and Dollar General

Dollar Tree (DLTR -0.14%) will release its quarterly report on Thursday, and investors are pleased to see the stock returning to new record highs. Yet even though Dollar General (DG 0.30%) and Family Dollar (FDO.DL) have seen similar share-price gains recently, Dollar Tree is still fighting hard to distinguish its stores from the many dollar-store operations that are popping up across the nation.

Since the recession, Dollar Tree and its peers have benefited from the need for deep-discount retail goods. As big-box retailers have struggled under the weight of their massive overhead, dollar stores have used a more sustainable footprint to support highly profitable operations. But as Dollar General has undertaken an aggressive expansion campaign, Dollar Tree and Family Dollar have both had to respond in order to defend their market share. 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 report.

Stats on Dollar Tree

Source: Yahoo! Finance.

How fast can Dollar Tree earnings grow?
Analysts have become a bit more optimistic about Dollar Tree earnings in recent months, boosting estimates for the quarter ended in October by a penny per share and raising fiscal 2015 projections by about 2.5%. The stock has kept on rising, with gains of 16% since mid-August.

Dollar Tree's results for the quarter ended in July got things off on the right foot for the deep-discount retailer, with same-store sales rising 3.7% to support an almost 10% jump in earnings per share. Despite missing estimates by a penny per share, Dollar Tree CEO Bob Sasser pointed to rising customer traffic, average spending, and operating margins as all contributing to help Dollar Tree's overall performance improvement. Investors also responded well to the company's solid guidance for the third quarter on income and revenue.

Yet on the competitive front, the retailer faces a big challenge from Dollar General, whose comps outpaced Dollar Tree's last quarter. Dollar General has taken steps including selling tobacco and other consumable items to drive growth, but that brings with it the risk of reducing margins. Similarly, Family Dollar's partnership with McLane has boosted its sales of refrigerated and frozen foods, and it's hoping to use private-branded items in order to support its profit margin going forward.

Dollar Tree, Dollar General, and Family Dollar all have to figure out how to grow in an increasingly saturated market. In particular, Dollar Tree and Dollar General have both invested heavily in growing store counts, with the result that overlapping markets and even cannibalization of their own store sales could become a factor.

What truly distinguishes Dollar Tree is its determination not to resort to low-margin items to boost sales. That dedication has helped its stock outperform its peers, and even as it rolls out refrigerated and frozen items of its own and looks above the $1 price point at its Deal$stores, Dollar Tree is positioning itself to maintain profitability, continue its share buybacks to help amplify earnings-per-share growth, and boost its presence around the country.

In the Dollar Tree earnings report, watch to see how the company's strategy responds to the competitive threats of Family Dollar and Dollar General. For the most part, though, Dollar Tree seems to have captured the spirit of the sluggish economic recovery, and only high valuations in the dollar-store space pose an obstacle to further share-price gains.

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