Single-price-point retailer Dollar Tree Stores
Today, the company reported that first-quarter net sales increased 5.5%, which doesn't sound bad until you realize Dollar Tree increased its store count by 8.2% during the quarter. Net income, a more important measure, fell by 17.5%. Even worse, same-store sales, the holy grail of retail measures, decreased 3.7%.
Reasons for the poor showing included adverse weather conditions, a shorter pre-Easter selling period (and markdowns to sell this slow-moving merchandise), higher freight costs, and customers feeling the impact of higher fuel costs. The results were operating margins falling to 6.4% in this year's first quarter from 8.3% in last year's first quarter. Yikes, that's not good.
As you might expect, the company's stock fell 2% in early-morning trading and has fallen 1.2% over the past 52 weeks -- underperforming the Standard & Poor's 500 by 7.5% over that same period. This five-year chart shows that the stock has done nothing more than move sideways -- dead money, in Wall Street parlance.
Don't fault the company for not supporting its shares. It spent the first quarter acting like Diamond Jim Brady by buying $128.3 million of its own stock. This served to reduce cash (on the balance sheet) by $74 million over the same period, at least to some extent. Interest coverage (earnings before interest and taxes divided by interest expense) for the first quarter came in at 31 times (that's healthy!), but the trends in same-store sales and margins are not encouraging.
How are similar stores doing? Big fish Dollar General
Retail competition like Wal-Mart
Dollar Tree hardly seems expensive at 14.4 times the mean analyst earnings estimate for fiscal 2005. But same-store sales are off while larger competitors are recording increases. This observer would avoid these shares until this company's long-term operating prospects showed signs of improvement.
Here are more Foolish ideas about the greenback-only marketplace:
- Lawrence Meyers' recent excellent (and funny) look at Dollar Tree's Dilemma .
- Nathan Slaughter's interesting look at Earnings Pennies on the Dollar.