Plant This Tree in Your Portfolio
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dollar Tree (NASDAQ: DLTR) might be one of the most simple to understand companies in the market today. If you've ever been into a Dollar Tree, you immediately know the business. Pricing is a non-issue because largely everything is $1, whether that be on the final sale price or on a per unit basis. This makes the company's goal very simple, they want to get big enough to buy in bulk and drive the cost of goods down. The company reported earnings not long ago which gives investors a chance to check up on this amazing company.
The company currently has about 4,344 stores in the U.S. and 107 in Canada. Dollar Tree isn't the largest company in the dollar denominated field. Their two largest competitors are Dollar General (NYSE: DG) which operates over 10,000 stores and Family Dollar Stores (NYSE: FDO) which has about 7,100 stores. What is interesting is, analysts don't see a large slowdown in growth even with these larger store counts. Dollar General is expected to grow earnings by nearly 18%, and Family Dollar is expected to see growth of about 15%. This should give investors in Dollar Tree some comfort that this company's growth story is far from over.
The company reported revenue up 11.49% and diluted EPS rose nearly 22%. In the most recent quarter, Dollar Tree opened 110 new stores, expanded 44 stores and closed 10 stores. From a base of 4,244 U.S. stores, 100 net new stores represents about 2.35% new store growth. If the company continues at the current pace as expected, Dollar Tree should see around 10% new store growth for the full year. With the company reporting a 5.6% increase in comparable store sales, it's easy to see why analysts are expecting over 17% long-term EPS growth. Keeping up with the trend in same store sales is very straightforward with Dollar Tree. While other companies might increase prices and see less guest traffic, Dollar Tree doesn't have this option. While bundled items play into the company's same store sale gains, this most recent quarter the company cited that same store sale gains were "primarily due to increased traffic." While new stores and higher comparable sales are clearly growth drivers, the company isn't stopping there.
Dollar Tree used to be a store my family had to plan to visit. We are part of the generation that doesn't really carry much cash. Originally, we had to stop by an ATM to get money to go shop at Dollar Tree. The company realized that this cash only policy caused it to miss sales. Dollar Tree intends to increase debit and credit card penetration at its stores to drive higher sales. Something that many people don't know is, companies like Dollar Tree who are very cash heavy depositors have a huge cost that accepting credit cards helps avoid.
A company like Dollar Tree doesn't just deposit all of their cash for free. In most cases, the company has to pay fees for armored vehicle cash delivery and pick-up. The company also pays a fee to their bank for the amount of cash they deposit. Banks have to employ more tellers to deal with a large cash depositor, and this means higher costs for the bank. This cost is passed along to the commercial depositor in the form of a cash per $1,000 fee. The point is, by driving debt and credit card sales, Dollar Tree should see higher sales. The company's costs might not increase as much as you would think by avoiding dealing with quite as much cash.
Another driver for future sales growth is further penetration of frozen and refrigerated merchandise. I've seen this at work in my local Dollar Tree. Most of the stores have space along one of the outside walls that allows for natural placement of frozen and refrigerated items. The smaller store size of Dollar Tree compared to many grocery stores, could also serve Dollar Tree well with this type of merchandise. If consumers know they can run in and out of Dollar Tree to get milk, cream, or other items quickly, they might choose to stop by Dollar Tree rather than the grocery store.
Long story short, Dollar Tree seems like a great growth story that is in the middle of what could be a multi-decade expansion. At current prices, the stock sells for about 22 times forward earnings. With expected EPS growth of over 17%, this doesn't sound like a bargain, but the company has beaten estimates by an average of 10% in the last four quarters. If this trend of beating estimates continues, the company's future growth rate could be understated. Most people have heard the question, “Do you think money grows on trees?” With this company, the answer to that question is yes it does.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.