Strong growth hasn't been enough to keep some number-crunching investors from shaking Dollar Tree ( DLTR).

The deep-discount chain has gained momentum the last year, its low-priced offerings growing more popular in a softening economy. But as the heat rises in Wall Street's summer of accounting scandal, some people are now turning a watchful eye on the company's books.

Some observers say the Chesapeake, Va., company uses accounting methods that make its numbers look better than they really are. These range from a quirk that allows Dollar Tree to report higher same-store sales to a series of so-called synthetic leases that serve to keep debt off the balance sheet. The latter device, though once widely used in the retail industry, has been abandoned by a number of other chains amid increasing scrutiny in the wake of Enron's collapse.

The methods are perfectly legal and acceptable under generally accepted accounting principles, or GAAP, and the company stands by its accounting. But these days, with investors demanding more from companies than the letter of the law, Dollar Tree's bookkeeping threatens to undermine its stock, which has easily outperformed a sinking market throughout 2002.

"Investors used to pay for growth," said a hedge fund manager who frequently trades retail stocks but has no position in Dollar Tree. "Now I think investors will pay a premium for disclosure and clean financial statements."

Picking Up the Pace

Dollar Tree is one of a trio of dollar store chains whose performance has won over investors weary of sinking technology stocks. The company and rivals Family Dollar ( FDO) and 99 Cents Only Stores ( NDN) have picked up the pace of expansion as the economy has gone into retreat.

Illustrating its growing cache, Dollar Tree is expected to grow earnings by 31% this year. The company recently beat Wall Street's second-quarter earnings forecasts. The stock traded Wedneday at $31, flat on the year but up 90% from a 52-week low reached last fall.

But the company's popularity may not be as well-earned as bulls would like. Dollar Tree's same-store sales figures -- a key retail indicator that often moves stock prices -- include added square footage from remodeled stores. Most retailers drop remodeled and expanded stores from the equation. Using the remodeled stores in its comps data gives Dollar Tree a small but important boost, some critics say.

In the latest quarter, the company reported a 2% gain in same-store sales. But according to one analyst's estimate, the number would have been flat had the company dropped the added square footage from remodeled stores. And last year the company's tiny 0.1% gain in same-store sales would have turned into a retreat if Dollar Tree hadn't included the new square footage.

Although the difference itself is small, even a minuscule change in the numbers could have completely changed the Dollar Tree story: Rather than a fast-growing industry leader, investors might have seen a seller of cheap goods staggered by an economic downturn.

"It is somewhat rare," said David Campbell, who covers the company for Davenport, of the reporting method. "But I think some years ago the store expansions had a bigger impact." He rates the stock strong buy, and his firm does not do investment banking.

A Dollar Tree spokeswoman defended the method and said the company has made investors aware of it.

"I don't see that there's an issue there -- we've talked to people about it," said Erica Robb, the spokeswoman. "When we close a store for remodeling, we don't take it out, so we don't just take the good stuff. We take both sides of it."

Still, the net effect of this practice is to boost so-called comps by 1% to 2% each quarter, according to John Zolidis, who covers the company for Buckingham Research. (He has an accumulate rating on the stock, and his firm doesn't do underwriting.)

New Lease on Life

Dollar Tree also utilizes a complicated form of financing called synthetic leases, which have come under so much scrutiny lately that a number of restaurant chains, such as Krispy Kreme and Ruby Tuesday, have said they will stop the practice. Under such deals, a special purpose entity, or SPE, is created to borrow funds, purchase the property and lease the facility.

The financing is attractive to some companies because it can reduce taxes, but here's the rub: At the end of lease, the company is obligated to purchase the building. And this liability is kept off a company's balance sheet.

Dollar Tree has a $165 million synthetic deal, of which $113 million is already committed, for the lease of three distribution centers. Because such arrangements involve SPEs, which played a key role in Enron's downfall, accounting for synthetic leases could change soon.

The Financial Accounting Standards Board has proposed new rules that would make it more difficult to engage in off balance sheet financing, a prospect Dollar Tree recently mentioned in an SEC filing: "Changes are currently being proposed to the current accounting for synthetic leases, which may make them less desirable in the future. The proposed changes in the required accounting for these transactions may adversely affect our results of operations and our consolidated balance sheets."

But because Dollar Tree has only $12 million in long-term debt on its books and $181 million in cash, it can afford to absorb the debt from the leases without altering the company's financial health, said Robb, the spokeswoman.

"I don't think we're particularly worried about that," she said. "We're not backed into the corner. It was the right move."

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