Dollar Tree's Selloff Could Be Overdone

Back in August, shares of Dollar Tree (DLTR) were taken to the woodshed. For the most recent quarter, the stock is down 16%. Dollar Tree reports third-quarter results on Nov. 22. Can it grow again? 

Back on Aug. 25, Dollar Tree reported a somewhat disappointing quarter. Second-quarter earnings of 72 cents per share were a penny worse than the consensus estimate. Revenue rose 66% to $5 billion, vs. the $5.08 billion estimate. The increase in revenue was due to the acquisition of Family Dollar Stores.

Management forecast third-quarter earnings of 76 cents to 82 cents per share, vs. an analyst estimate of 77 cents  and revenue between $5.02 to $5.1 billion.

For the full year, management provided a mix picture. The company raised earnings guidance but lowered revenue guidance. Management is now forecasting earnings of $3.74 per share and revenue of $20.78 billion.

Same-store sales increased 1.2% vs. 2.7% in the same period last year. The increase was driven by increased traffic and a slightly higher average ticket. The company opened a total of 99 net new stores. Selling square footage increased 10.4%, and the company ended the quarter with 6,184 Dollar Tree stores. The company remains on track to open 200 new Family Dollar stores in 2016.

While the guidance wasn't that bad, the stock was destroyed, especially after Dollar General (DG) said on its conference call that low-income consumers were budget-constrained.

In my opinion, the selloff in the stock seems overdone.

Dollar Tree should be able to post low-single-digit same-store sales growth through fiscal 2017. The increase is being driven by increases in store traffic as Dollar Tree is committed to expanding its merchandise categories to include refrigerated and frozen foods.

The company is also expected to exceed its $300 million goal of cost savings from the Family Dollar acquisition by the end of the fiscal year.

Operating margin increased 246 basis points to 7.15%, driven by higher gross margins. Gross margin was up 187 basis points to 30.27%. Inventory ended the quarter at $2.9 billion, up 5.3%.

Dollar Tree reports third-quarter results on Nov. 22, and the consensus is looking for earnings of 78 cents per share and revenue of $5 billion.

Dollar Tree's acquisition seems to be going along as planned, and the combined companies should be able to produce double-digit earnings growth over the next few years, which would drive the stock higher.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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