This morning, deep-discounter Dollar Tree (NASDAQ:DLTR) announced that its third-quarter earnings had dropped 10% from last year's third quarter, to $0.28 per share, or $31.9 million total, but thanks to a sunnier fourth-quarter outlook, shares of the Virginia-based retailer are trading higher by about, well, a dollar.
Management has told the analyst community to set its sights higher and is forecasting fourth-quarter EPS of $0.80-$0.82, which at the high end would mark an improvement of nearly 19% from the $0.69 earned a year ago.
Sales increased 9% to $724 million but fell short of the internal targeted range of $730 million-$750 million, as new-store openings ran a little behind schedule. Same-store sales improved 0.7%, reversing last quarter's 0.2% decline and topping the 0.5% third-quarter gain posted by rival 99 Cents Only (NYSE:NDN). Family Dollar (NYSE:FDO) is not scheduled to release its quarterly results until December but did recently report a similar 0.9% rise in October comps. Dollar General (NYSE:DG) continues to lead the pack and has seen comps rise 3.2% year-to-date, trouncing the slim 0.2% full-year gain posted by Dollar Tree.
The company has enjoyed an impressive 33% compounded annual growth rate in sales over the past decade, fueled in large part by rapid expansion and acquisitions. Eventually, though, as it operates from a larger store base, expansion will have less of an impact and comps will become increasingly important. For now, though, there are still plenty of opportunities for growth. Square footage has swelled by 18.4% over the past year, and the number of stores has grown to more than 2,600, a figure management claims it can double.
Dollar Tree has also historically been able to squeeze more profits than its peers out of each dollar in sales. This may be changing, though, as operating margins have been sliding lower, shedding a full point over the first three quarters to 7.5%. Gross margins slipped 120 basis points during the quarter to 35.4%, hurt primarily by hurricane-related markdowns.
Dollar Tree may be only a sapling compared with larger players such as Dollar General, but the company is growing steadily, recent margin contractions notwithstanding. Furthermore, with almost $40 million in trailing annual cash flows, Dollar Tree trades at an EV/EBITDA ratio of less than 8. This, combined with a PEG ratio of just 0.9 -- well below competitors such as 99 Cents Only (2.0), Dollar General (1.1), and Family Dollar (1.3) -- makes the company appealing to both shoppers and investors who like to browse the discount aisles.
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Fool contributor Nathan Slaughter owns none of the companies mentioned.
