Here Is Why Shares of Dollar Tree Should Be Snapped Up Right Now

America's biggest dollar store chain Dollar Tree (DLTR) is on fire.

The company, with more than 14,000 discount variety stores, topped analysts' third-quarter earnings estimates and bumped up guidance. No wonder, the stock is up nearly 15% this year and is outperforming rivals Dollar General, Fred's and PriceSmart.

Although critics have suggested that Walmart and even Amazon could cut into discount-store sales numbers, Dollar Tree has withstood the competition.

After the Family Dollar acquisition, Dollar Tree has fortified its sizable scale, as well as its fixed and multi-price-point product offerings.

The sector should perform favorably and will continue to find currency given its convenient locations and low prices.

Dollar Tree's debt situation at $7.3 billion should improve in the next 12 months. This will happen even as its debt/earnings before interest, taxes, depreciation and amortization may fall below 4 times from 6 times as the company integrates its July 2015 acquisition of Family Dollar.

The company's third-quarter same-store sales were up 1.7%, with total sales at $5 billion.

The retailer also said that average ticket and customer traffic were individually encouraging during the three-month period.

Gross margins as a share of sales improved 210 basis points to 30.4%, while selling, general and administrative expenses fell 20 basis points to 23.6% of revenue.

Solid results from Dollar Tree and Burlington Stores' third-quarter report have pushed expectations higher. Chico's FAS and DSW also delivered solid reports.

Dollar Tree projects full-year sales between $20.67 billion and $20.77 billion and earnings between $3.67 a share and $3.76 a share, though the consensus analyst estimate is at $3.69 a share.

If the company is able to increase profitability, maintain same-store sales growth and pay down debt, it should be a surefire winner.

The Family Dollar acquisition has been highly complementary in geographic and product profiles, and that should help Dollar Tree gain massively.

The company will likely streamline sourcing and procurement, optimize product offerings, improve traffic and increase higher-margin sales.

The use of private label in Family Dollar stores will be essential for Dollar Tree.

The company is also expected to reduce expenses and improve cash flow generation of the combined company and use its solid liquidity position of more than $1 billion in cash to ample effect.

Most analysts have a buy rating on the stock.

There are very few retailers that are thriving. At less than 20 times forward earnings, shares of Dollar Tree is performing well and has an attractive valuation.

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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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