Discount variety store chain Dollar Tree (NASDAQ:DLTR) will report third-quarter results tomorrow, and considering the company preannounced sales results at the beginning of the month, here's a cut-rate forecast of what to expect.

What analysts say:

  • Buy, sell, or waffle? Of the 14 analysts rating this stock, nine say hold, three say buy or strong buy, and two say put your shares up for sale.
  • Revenues. Analysts have expected the low-price operator to ring up $907.9 million, a 14% increase over last year.
  • Earnings. The discounter had expected to earn $0.32 per share in the third quarter, $0.03 better than what they did the year before.

What management says:
When the company preannounced its sales at the start of November, Bob Sasser, company president and CEO, said, "The sales momentum that was consistent in the first half of the year continued in the third quarter. Comparable-store sales growth benefited from increases in both customer traffic and average ticket." Comps, which are for sales at stores open for at least a year and are considered an important retail metric, rose 4% for the quarter.

Last quarter, management said it believes rising sales have a lot to do with the introduction of freezers and coolers to its stores, which have shifted the customer's product mix more toward consumables. They had more than tripled the number of stores with them, and plan to roll out freezers and coolers to 150 more stores by the end of 2006. Additionally, Dollar Tree has given customers more payment options by permitting the use of debit cards at virtually all of its stores. That increased flexibility ought to encourage more sales.

What management does:
Despite the growth in sales, the trend toward sales of more consumables will end up impacting margins because of the costs associated with them (those freezers cost money to run) even as they are said to improve efficiency.

Margins % 07/05 10/05 01/06 04/06 07/06
Gross 34.8 34.6 34.5 34.4 34.2
Op. 8.7 8.5 8.4 8.2 8.1
Net 5.3 5.2 5.1 5.1 5.0
All data courtesy of CapitalIQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

Yet Dollar Tree is still the margin leader when compared to the competition.

Company Op. Margin LTM %
99 Cents Only (NYSE:NDN) 1.4
Big Lots (NYSE:BIG) 1.4
Dollar General (NYSE:DG) 5.6
Family Dollar (NYSE:FDO) 5.8
Fred's (NASDAQ:FRED) 2.6
All data courtesy of CapitalIQ, a division of Standard & Poor's.

One Fool says:
Although the company is experiencing some steady margin compression right now as its customers continue to shift toward more consumables purchases, it also continues to roll out new stores with larger footprints (it believes 11,000 to 12,500 square feet is its optimal size) and make acquisitions (it acquired Deal$ earlier this year). This should help with a shift in perception about the discount variety store, making it become more of a "destination store."

Investors still need to watch the margin compression. As store size increases average ticket sales need to increase commensurately, which management tells us is happening. Yet the fact that it gets a large percentage of its products from China means it would be sensitive to currency fluctuations (a rise in the yuan against the dollar would compress margins further) as well as high fuel prices in terms of transportation costs. The stock definitely isn't selling at a discount now considering that it's just under its 52-week highs, and to this Fool that means there isn't much margin of safety left for investors considering getting in now.


  • 99 Cents Only
  • Big Lots
  • Dollar General
  • Family Dollar
  • Fred's
  • Wal-Mart (NYSE:WMT)

Related Foolishness

Dollar Tree and Wal-Mart are recommendations of Motley Fool Inside Value , which is beating the market by 12 percentage points. A 30-day guest pass gives you full access to all of the stocks that are being sold at a discount to their intrinsic value.

Family Dollar is a recommendation of Motley Fool Stock Advisor .

Fool contributor Rich Duprey owns shares of Wal-Mart but does not own shares of any of the other stocks appearing in this article. The Fool has a disclosure policy.