Do you buy this argument? Dollar Tree (NASDAQ:DLTR) says higher gas prices are reducing the number of trips that customers make to its stores. For its second quarter, the company is reporting that same-store sales -- the retail measure of sales robustness -- fell 1.5% compared with the comparable quarter a year ago.
Competitor Family Dollar (NYSE:FDO) is expecting a 2% to 4% drop in same-store sales in the current quarter, and 99 Cents Only Stores (NYSE:NDN) recently reported a 2.9% decrease in its comps. Ah, but don't call it a trend just yet.
Dollar General (NYSE:DG), the big gorilla in the just-a-buck segment, has already reported that its same-store sales for the 13-week period ending July 29 were up by 3.9%. Even Wal-Mart (NYSE:WMT), which has experienced sales weakness that it attributes to high gasoline prices, saw its U.S. comps rise by 3.5% in its latest quarter.
So let's greet this argument with some skepticism. Gasoline prices may be limiting travel, but they aren't causing everyone's sales to shrink at stores that have been open for more than a year. Still, higher freight costs and lower comps did contribute to a 0.9% drop in operating margins (to 6.1%), and net income followed, falling 7.8%.
Dollar Tree also updated the fiscal-year revenue and earnings guidance that it had released in the first quarter. Expected revenue is dropping from a range of $3.34 billion to $3.42 billion to a span of $3.33 billion to $3.38 billion. Expected earnings are being cut from $1.61 to $1.72 to a range of $1.57 to $1.66 a share.
What Dollar Tree is doing right is controlling costs. Selling, general, and administrative expenses fell 0.7% to 27.9% of sales in the latest quarter, while inventories fell 2.9% thanks to better inventory management.
At the high end of guidance, the stock is trading for 14.1 times forward earnings. Analysts still expect the company to grow earnings by 14.5% annually over the next five years. If they are right, the stock is very reasonably priced. However, given the divergent same-store-sales trend, I do not find this stock attractive in the current market environment.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
