Planting This Tree Would Secure Your Portfolio

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the current environment, where luxury companies such as Coach are finding it difficult to perform decently, investors might be skeptical to put their money on retail stocks. A weak holiday season and budget restrained customers have made it difficult for the companies to perform well. However, things are not that bad and there is still hope.

There are companies who have been doing extremely well, without the prevailing situation affecting them. One of those outperformers is Dollar Tree (NASDAQ: DLTR), a discount retailer which is one of the top beneficiaries of tough conditions. It posted solid results which were ahead of expectations, and brought relief to investors. Let’s dig deeper.

An amazing quarter

Driven by huge demand for Dollar Tree’s low priced necessities, revenue grew 15% to $2.25 billion. The company’s varied priced products not only attracted more customer traffic, but also led to larger purchases made by customers on each visit. The retailer has made commendable efforts to control costs, which boosted the bottom line by 22% to $1.01 per share.

One of the key reasons for Dollar Tree’s growth is its geographical expansion, new retail formats, and various channels of distribution. The company added 47 new stores during the quarter, which led to the amazing growth in top line. New formats such as Deal$ stores, which offer varied products at different price points, have also been quite successful.

The discount retailer’s direct distribution channel, the E-commerce business, has been performing remarkably well, and hence the company has been focusing on its expansion. With more and more collection being available, website traffic has been improving. The company plans to further enhance this channel going forward.

Apart from offering a variety of products for $1, the company has increased its frozen and refrigerated products portfolio in many of its stores. This has been an added attraction for the customers.

Remarkable performance

Dollar Tree is one of the best performing players in the industry. Its performance, in terms of returns to its investors, in comparison to peers such as Wal-Mart (NYSE: WMT), Dollar General (NYSE: DG), and Family Dollar Stores (NYSE: FDO) can be assessed in the chart below:

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DLTR data by YCharts

Clearly, Dollar Tree tops the list with a whopping 172% increase in its stock price over the last 5 years. The company’s continuous growth and effective cost management techniques have enabled it to shine brightly.

Even Family Dollar Stores and Dollar General have been able to give great returns, owing to their low prices and customers’ budget consciousness. Family Dollar has been growing largely through addition of new stores. It opened 35 new stores in February, which shows how the company has been benefitting from increased footfall of customers. It has also renovated its stores to attract more attention of customers.

Dollar General offers a great variety of products for less than $10. It has been adding refrigerated products and various branded toys to lure customers. It has not only restructured its stores, but also plans to add more than 600 new stores this year. Given consumers’ interests in such stores selling merchandise at low prices, these stores might become recession proof.

However, Wal-Mart has not been up to the mark, with only 45% appreciation in its price. This is mainly because the company lost its customers to other discount stores during difficult times. Moreover, its cost structure was also heavy, since it operated large format stores. However, Wal-Mart has changed its strategy completely to win back lost customers.

It has started opening smaller neighborhood stores which drive higher traffic and are less costly. Also, it plans to provide huge discounts in order to keep pace with the other players in the industry.

Final thoughts

Though all the industry players look attractive, Dollar Tree has been exceptionally good. It has been expanding its presence, and plans to continue to do so with another 340 new stores in the current year. Its growing frozen products and e-commerce business will also help in the the future. Because of its low-priced products, the retailer’s market will continue to flourish.

This is not only because of the prevailing conditions, but also because of the fact that there is a vast section of the society which is price sensitive. Hence, owning this company will be a perfect investment at any point of time.

justhimanshu has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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