Dollar Tree Sprouts Growth

When fiscal years have an extra week in them, it can help a troubled enterprise look better. When that extra week includes a strong performance, results can look remarkable. That's what happened at deep discount retailer Dollar Tree (NASDAQ:DLTR) in the fourth quarter: a 14th week that boosted already robust sales even more.

The discount variety chain had witnessed 15% revenue growth in the typical 13-week quarter, but the extra week added an additional $70 million in sales. While previous quarters saw rising sales as a result of the addition of freezers to its stores, the former Motley Fool Inside Value recommendation has also been printing up dollars by allowing customers to pay with debit cards and other cash alternatives. The greater mix of goods and flexibility in how customers' pay for them drove same-store sales 5.5% higher for the 14 weeks, and added a a 1.9% increase in the size of average transactions.

The product mix that Dollar Tree was able to offer was primarily driven by the freezers and coolers that the chain rolled out to more stores last year. Previously that had led to margin compression, but the leverage gained by the extra selling week helped boost margins this quarter by 40 basis points. The fourth quarter is typically Dollar Tree's strongest because of the Christmas season, and an introduction of gift cards helped keep sales strong after the holidays ended.

While gross profit margins improved, operating margins slipped, as the fourth quarter tends to be the one where incentives and bonuses are paid out. Plus the company increased the amount of advertising. Those costs trickled down to the bottom line, though net income was 18.5% higher than last year, at $0.96 per share. Despite the fall, Dollar Tree is still the margin leader.

Yet was that increase partially a result of a curiously timed share buyback program announced in December? Dollar Tree spent $100 million to buy back 2.7 million shares from Goldman Sachs (NYSE:GS) at an estimated 23% premium, as calculated by Fool analyst Seth Jayson. As he noted, executives get cash bonuses and restricted stock compensation based on achieving EPS goals. While sales were strong and the extra retail week gave results a boost, Dollar Tree's Deal$ acquisition has been dragging margins down, as have higher sales of consumables. If earnings can't be boosted, the other way to juice results is to reduce the share count.

Dollar Tree had already spent $148 million buying back shares and then it authorized an additional $500 million program. However, as fellow Fool Rich Smith pointed out, Dollar Tree only had $119 million at the time and negative free cash flow. Dollar Tree ended the year with just $85 million in cash, but free cash flow turned positive.

Let's not take too much away from Dollar Tree's good quarter. It grew sales, raised comps, and improved sales per average transaction. Yet sometimes the tail wags the dog. While an 18% increase in earnings per share is impressive, it also brings into question motives for using shareholder cash for purposes other than investing in the company.

Dollar Tree is a former recommendation of Motley Fool Inside Value. Take a 30-day free trial subscription to learn why Philip Durell changed his mind.

Family Dollar is a recommendation of Motley Fool Stock Advisor.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.