Dollar Tree (NASDAQ: DLTR) reported a truly excellent quarter. The stats contained in the release are monumentally impressive. Dollar Tree increased sales almost 12% in Q2, a performance that essentially matched expectations. Per-share income soared 50% to 63 cents, beating estimates of 54 cents per share.
This is one of those situations where all the numbers point toward future growth. Margins increased, as did cash from operations (I enjoyed the fact that capital expenditures didn't go up too much). Same-store sales moved higher by 6.8%, and management's outlook for the rest of the fiscal year received a boost. And judging by the guidance, I'd say that Dollar Tree shares aren't overly expensive at the moment. Let's add a technical factor to go along with my opinion of the valuation: Dollar Tree closed Wednesday to the upside by well over 4% on the earnings news, not far at all from a 52-week high. The price action was accompanied by healthy volume.
To me, all of this suggests that the company is a buy. However, let's now go back in time and check on a little history. I last covered Dollar Tree near the end of May. I thought the retailer's first quarter was also quite remarkable. However, the stock did sell off from around that point until roughly the beginning of July before rising again (you can pull up a chart to see this at AOL quotes).
It's obviously impossible to predict if this pattern will repeat itself, but please remember all the warnings we've been hearing from the pundits: a major correction may be coming. So, what I'd say about Dollar Tree is this: watch it closely, and if you feel you must buy this great fundamental story, get in after some of the 52-week-high excitement has dissipated.
Longer-term buyers don't have to worry so much about technicals. They could theoretically open a position and then improve the cost basis over time. Dollar Tree, like Family Dollar Stores (NYSE: FDO), represents a fun business model for many consumers. It's neat to go into one of these places and know you'll pay a buck for each item. It's a competitive strategy guaranteed to allow the chains to coexist with the likes of Wal-Mart (NYSE: WMT) and Target (NYSE: TGT). They should be around for quite some time.
Disclosure: I don't own any company mentioned; positions can change without notice.
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