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Dollar Tree (NASDAQ: DLTR) saw a nice increase in its bottom-line profit. The retailer, which reported earnings for the first quarter earlier this week, said it made 66 cents per share, good for an increase of more than 37%. Revenues increased 14%, and same-store sales went up a whopping 9%. So many retailers would absolutely kill to have that same-store number.
It's no secret why Dollar Tree is thriving. Bad economy plus items-that-sell-for-a-dollar-each equals retail success. Brand equity is important. So is convenience. But a cheap price point oftentimes trumps all.
The stock is close to a 52-week high. You're looking at it, and you're saying to yourself, should I get in at this point?
Well, let's look at a recent piece by my colleague Zac Bissonnette. He highlighted the particular problem with this trade: if the economy is truly getting better as the markets seem to be indicating, then should companies like Dollar Tree and Family Dollar Stores (NYSE: FDO) be sold off?
Indeed, it might be scary buying now. If the economy is improving, then retailers like Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) might be better plays. As a matter of fact, they might be extremely better plays. Why? Because both have a reputation for being great places to shop because they sell merchandise for less (Wal-Mart obviously has the better reputation in this regard). No, not everything in their respective stores is a dollar certainly, but, by placing bets on those major retailers, you might be able to capture the consumer's need for value with the notion that people are better prepared, in a financial sense, to switch back to shopping at more expensive discount stores as the fundamentals of the economy get better.
That's the theory, anyway. Now, what about the capitalistic reality? And by that I mean, what are the charts saying? Well, to my eye, at least, the chart of Dollar Tree suggests to me that it might be ripe for a pullback and that you might be able to buy with a tight stop. I don't think I would consider buying the stock until it dipped below $40 per share. I'm not sure it will get there. Maybe momentum will take it higher from here. But that's my thinking for now. Dollar Tree is doing well, and it will be interesting to see if it continues on that trend.
Disclosure: I don't own any company mentioned; positions can change without notice.
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