DLTR Is in the Right Spot

For Rothbort's preview heading into the Dollar Tree conference call, please click here.

Shares of Dollar Tree (DLTR - commentary - Cramer's Take) surged after the company announced better-than-expected earnings and remain higher, even as the markets have pulled back a bit in the late morning. The business is certainly in the right spot of retail for this economy. The company is using better inventory management, refrigerated products and debit/credit sales to further boost sales and attract more traffic.

For the full year, Dollar Tree is now expected to earn between $2.43 and $2.51 per share. We should expect 10% growth in 2009 based on a continued slow economy in the first half of the year and store expansion.

By traditional retail metrics, Dollar Tree could trade into the low to mid $50s. All bets are off, however, in this depressed market. Still, a mid $40s price target, which is just over 10% higher than today's price, could be easily attained.

The company reported third-quarter EPS of 47 cents on net sales of $1.114 billion (as previously announced). Same-store comps were 6.2%, which was primarily attributed to increased traffic, (Only 1% was due to increase in transaction size.)

Year-to-date, total net sales rose 10.7% on same-store comps of 4.9%. Year-to-date EPS were $1.37.

Gross margins declined 40 basis points year over year, to 34.1%. Contributing to the margin decline was higher diesel fuel costs and product mix. SG&A was 27.8% vs. 28.4% a year ago. The effective tax rate was 35.7% vs. 36.5% a year ago.

Long-term debt outstanding was $250 million, a decline of $85 million year over year.

Business drivers included the following:

• economic uncertainty;
• higher energy prices in the quarter (though that has not reversed);
• expansion of freezers, refrigeration units and coolers to more stores; and
• improvements in in-stock inventory managements using point-of-sale systems and auto replenishment systems.

Increased traffic was attributed to demand for health care and beauty care items, household cleaning supplies, paper goods, food and beverages, party supplies, seasonal items, stationery and toys.

Sales for debit cards and Visa (V - commentary - Cramer's Take) credit cards helped to drive average ticket sales. Visa's contribution to comps was about 1%, and management expects the penetration of Visa credit usage to continue to rise. Food stamps are now accepted in more than 2,000 stores, and the company plans to increase food-stamp-eligible products in the future.

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At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.