A Buying Opportunity for Value Investors
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There is a company. It is a good company with sound fundamentals. It has beaten the Street in the just-concluded quarter, saw its top line jump and earnings grow. But, it fails to provide an outlook to quench the thirst of analysts on the Street. What happens next? The stock plummets and a window of opportunity opens up for value investors.
What happened and why
A story along these lines transpired when discount retailer Dollar Tree (NASDAQ: DLTR) came out with its first quarter results. The company’s revenue spiked roughly 11.5% to $1.72 billion in the quarter, ahead of the $1.69 billion modeled by analysts and its earnings improved 15% from last year. However, a downbeat guidance for the current quarter sent the shares into a tizzy as they lost 6% in extended trading.
As I said, this drop has opened up a door for you to get into the stock. But before you do that, let’s take a look at what’s so good about Dollar Tree.
Looking beyond the quarter
Dollar Tree operates a chain of more than 4,000 stores across 48 states in the U.S. and another 100 stores in Canada, selling merchandise for a maximum of $1. It sells a variety of products ranging from consumables to personal care products to gifts and toys and what not. Therefore, one would expect customers to visit its stores irrespective of how the economy is faring. And as we try and wriggle out of a shaky economic position, Dollar Tree’s same-store sales jumped 5.6% from last year as more consumers went deal hunting.
Dollar Tree knows the value it is providing to consumers by stocking items of basic use and other seasonal items for $1 or less. And it is intent on delivering its values to a greater number of consumers. Pursuing this strategy, the company opened 110 new stores in the first quarter and perked up another 44 stores, growing its square foot area by 7% from last year and ending the quarter with 4,451 stores.
But that’s not the end. Dollar Tree intends to add another 315 stores through the rest of the year across the U.S. and Canada, along with relocating or expanding another 75 stores. The company is looking to scale up its Canadian stores to the level of its counterparts in the U.S. and improve their output.
There is still a lot of opportunity for Dollar Tree in both the Canadian and U.S. markets. Management says that the Canadian market can hold around 1,000 of its stores and it currently has just one-tenth of that figure at 107 stores. Also, the U.S. market can go up to 7,000 stores whereas the company currently has around 4,300 stores. Looking at the company’s expansion plans, it seems that Dollar Tree is slowly but surely inching its way toward establishing a wider network of stores to drive its top line further.
Expanding the web
Another bright spot that would make investors more confident of the stock’s prospects is the growth in its online business. Dollar Tree has another channel of selling its products, known as Dollar Tree Direct. This enables the company to enhance its reach further without the pain of building a store. Dollar Tree Direct now offers in excess of 2,500 items and site traffic increased 19% from last year on Dollar Tree’s online stores.
With all such positives in the bag, there is no need for investors to get disheartened after the recent sell-off post earnings. Instead, this is a buying opportunity. Stocks of discount retailers perform well even in recessionary conditions. Dollar Tree has beaten the S&P 500 so far this year and it is not alone. Other discount retailers such as Dollar General (NYSE: DG) and Family Dollar (NYSE: FDO) have also outperformed the index.
However, as far as the valuation is concerned, Dollar Tree trades at an expensive P/E multiple of 23.59 as compared to Family Dollar's 19.15 and Dollar General's 20.73. But going forward, analysts expect Dollar Tree to grow its earnings the most as shown by a forward P/E of 16.77, compared to Family Dollar's 15.36 and Dollar General's 14.20. This should provide investors with more confidence in Dollar Tree's abilities as it's working toward improving earnings over a longer span of time. Thus, one needn't be disheartened by a shallow outlook for the current quarter as the company seems to be capable of delivering in the long run.
Keeping the long-term picture in mind, I believe there are more reasons to hold onto Dollar Tree, and even buy more of it. The company is expanding into uncharted territories, making its presence felt online and has a robust supply chain. These moves will probably deliver more growth to both consumers and investors in future.
TechJunk13 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.