What: Discount retailer Dollar Tree's (DLTR 0.99%) stock rose 10% in 2015, according to S&P Capital IQ data. Shares had been up by as much as 17% -- and lower by 12% -- before they recovered to end the year on a positive note. By comparison, the broader market fell 1% in 2015.
So what: Dollar Tree's performance was driven by two major events: (1) continued strong sales growth as its discount model attracted higher customer traffic, and (2) the integration of the huge Family Dollar business that it purchased for $9 billion.
On the first point, Dollar Tree's stores took advantage of steady demand for discount shopping on everything from cleaning supplies, to snacks, to home decorating products. Comparable-store sales rose 2% in the third quarter, on top of a 6% increase in the prior-year period.
Comps were up a solid 2.5% in the nine months ended on Sept. 30, 2015. "Dollar Tree continues to be part of the solution for millions of consumers as they strive to balance their household budgets," CEO Bob Sasser said in a November conference call with investors.
Meanwhile, the Family Dollar merger is dramatically reshaping Dollar Tree's business. Total gross profit almost doubled last quarter, to $1.4 billion. Yet profitably has taken a big hit since much of Family Dollar's merchandise carries lower margins than Dollar Tree's does. Overall gross margin dove to 28% of sales last quarter from 35% a year ago.
Now what: Sasser and his team plan to slowly lift the Family Dollar brand's performance higher through strategies like clearing out weak inventory, improving the customer experience, and cutting expenses. Yet it is likely that there will be bumps in the road for an integration of this magnitude -- and complexity. Dollar Tree is combining more than 13,000 store locations and 23 distribution centers, after all.
For the holiday quarter that just closed, management targeted steady comps growth on par with what it had been posting all year. It also expects overall sales and profits to rise sharply, even as profitability ticks lower. EPS should jump to $2.42 per share from $1.72 last year as combined sales rise by 119% to $5.4 billion.