These days, low prices are good business. Dollar stores such as Dollar Tree (DLTR), Dollar General (DG) and Family Dollar (FDO) prosper with a simple but powerful strategy: products priced under $1. Of the three, Dollar Tree’s stock has performed the best, surging 27.4 percent so far this year.
Why? Relentless growth and tight inventory management. Dollar Tree, based in Chesapeake, Va., opened 76 stores and expanded 23 others in the second-quarter. It now operates 4,242 stores in 48 states and Canada, and management thinks there’s room for up to 7,000. Also, Dollar Tree has the tightest operating margins in this niche due to effective inventory and expense management.
Dollar Tree is a sales machine. Second quarter net sales rose 11.9 percent to $1.54 billion compared to a year ago. Comparable store sales rose 4.7 percent. “Increases in customer traffic and average ticket drove our sales growth,” notes Dollar Tree CEO Bob Sasser. Lately, the chain has added more consumables, such as frozen and refrigerated foods, along with its usual housewares, gifts, hardware, and other goods.
Dollar Tree rewards its investors by repurchasing company shares. The most recent buyback, $200 million of its common shares, was announced in June.
Of the 21 analysts followed by Thomson/First Call, five have strong buys on Dollar Tree and seven have buys, with nine holds.
S&P analysts have a hold rating, citing Dollar Tree’s high valuation. But they’re positive about the company’s future, such as its domestic and international expansion, and strong cash flow. The company next reports in mid-November.
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