Dollar Tree Is a Discount Retailer Stock for Which to Be Thankful

At the beginning of the year, analysts hailed discount and dollar stores as bricks-and-mortar retail's last hope in the struggle against e-commerce.

Research firm BTIG went so far as to name dollar store plays, Dollar General and Dollar Tree (DLTR) , as two top investment picks for 2016, slapping 12-month price targets up to $105 and $104 a share, respectively, on the stocks.

These highs certainly looked possible, as both stocks shot very close to $100 a share over the summer.

But then a few niggling factors combined to create major headwinds for both companies. Lower prices for groceries and produce, an increase in competition in the discount-retail sector, and the reduction of food stamp benefits in several states all contributed to slumps in the stores' second quarters.

Both Dollar Tree and Dollar General saw their stocks plummet toward the end of the summer as a result.

However, Dollar Tree looks poised for a comeback and may still cross the $100-per-share threshold.

On Tuesday, the company reported third-quarter earnings results that beat Wall Street's expectations and led management to improve its fourth-quarter guidance. Investors are celebrating, sending the stock up more than 8%.

During the third quarter, net income rose to $171.6 million or 72 cents a share a huge leap from $81.9 million or 35 cents a share a year earlier. Excluding items, Dollar Tree's earnings of 81 cents a share earnings soundly beat analysts' forecast of 78 cents a share.

And though total sales slightly missed the consensus estimates, clocking in at $5 billion, versus $5.08 billion, existing-store sales increased by more than expected, by 1.7%. Clearly, more people are shopping at Dollar Tree, and they are spending more money during each shopping trip than before.

Chief Executive Bob Sasser praised Dollar Tree's "meaningful progress" in reaching the full potential of its Family Dollar deal.

Last year, the company purchased Family Dollar for $9.2 billion, which made Dollar Tree the biggest dollar store chain in the U.S.

Perhaps most appealing to investors, the company raised fourth-quarter earnings guidance to a range of $1.24 a share to $1.33 a share from a previous forecast of between $1.21 a share and $1.30 a share.

The second-quarter slump was likely an aberration.

Dollar Tree has what it takes to continue to thrive and perhaps even benefit from economic uncertainty. And there is certainly economic uncertainty in the retail sector, with e-commerce companies such as Amazon growing more powerful by the day.

Dollar stores fulfill a need that Amazon still can't by providing a specific small item cheaply and quickly. The convenience of dollar stores has led to even Walmart to copying the idea, creating its own line of smaller stores that offer low-price essentials.

However, Dollar Tree has the formula down pat. Continue to look for profit opportunities in this stock, and pick up more shares on the dips.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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