Consider Buying This Cheap Stock, it Might Help you Beat the Recession

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

The probability of falling off the fiscal cliff and recession in the Euro zone is possibly the worst double whammy situation in recent times that we are staring at. These two events would probably land a heavy blow on consumer confidence as austerity measures come into play, forcing consumers to stretch their dollars as much as possible.

But, in such times, there are a few stocks that could turn out to be winners. I have always said that discount retailers could be one of the safest bets in a volatile economic situation. Hence, it would be wise to take a look at a discount retailer that’s not too expensive, is trading within 11% of its 52-week low, just reported a solid quarter and there are indications that it would get better going forward.

What Happened

Dollar Tree (NASDAQ: DLTR), the Chesapeake-based discount retailer with stores in the U.S. and Canada, recently released impressive third-quarter results that beat analyst estimates on the bottom line. The company witnessed an improvement in customer traffic in its stores, leading to a 1.6% improvement in same-store sales. As a result, revenue improved 7.8% from last year to $1.72 billion in the quarter.

In addition, Dollar Tree also exhibited an improvement in adjusted earnings and operating margin. The results should bring some relief to Dollar Tree investors, who have seen the stock lose momentum after a strong start to the year. The stock has depreciated almost 22% over the past six months, but spiked more than 5% after the third-quarter report.

Going on the Offensive

But the discounter doesn’t wish to stop here. It’s bolstering its store presence and aims to improve its range of products. It intends to go light on the customer’s wallet as much as possible by way of its $1 offerings. These products would most probably help Dollar Tree repeat its solid performance in the coming quarters as well since customers would be looking for more value deals in order to maximize their savings.

Dollar Tree has opened close to 300 stores so far this fiscal year, and has relocated another 81. The company is pretty close to its initial full year target of 315 new stores, but it is ready to go the extra mile. Dollar Tree now intends to open another 97 stores this year, and that will take its total new store count for 2012 to 395 stores. Hence, it is going all out to challenge its peers Dollar General (NYSE: DG) and Family Dollar Stores (NYSE: FDO) for market share.

And Dollar Tree does need to focus a lot on accelerating its store presence as both of its above mentioned peers are quite ahead in terms of store count. Dollar General, with more than 10,000 stores, is the leading discount retailer followed by Family Dollar which has above 7,000 stores.

Moreover, both Dollar General and Family Dollar posted superior same-store sales growth of 5.1% and 5.4% respectively in their previous quarters. So, Dollar Tree is doing the right thing by expanding its store count aggressively as this might help provide a bump to its own same-store sale growth in the future.

Strategic Moves

But, aggressive store growth is not the only factor that’s going to help Dollar Tree perform better. The company is also focused on building strategies that will lead to an improvement in sales. For example, it is pushing sales of related items and realigning key products to the front of its stores in order to promote impulse purchases.

Also, Dollar Tree is being flexible as far as pricing is concerned in order to offer the best deals to customers. It removed the $1 cap in its Deal$ stores, and efficiently expanded its audience. In addition, the company’s online portal, Dollar Tree Direct, is also gaining traction. Dollar Tree Direct witnessed a 19% improvement in traffic in the previous quarter, and the company is aggressively adding more products for sale through its online platform.

Cheap and Best

Dollar stores are well-positioned to gain from a weak economy and Dollar Tree is looking to play catch up with its peers. The company might be the worst performer amongst its peers so far this year but it has the ingredients to stage a turn around. In addition, the stock is cheap when stacked against Dollar General and Family Dollar.

Dollar Tree, with a trailing P/E of 17.68, is cheaper than Dollar General’s P/E of 18.37 and Family Dollar’s 18.41. In addition, Dollar Tree sports a PEG ratio of 0.91, which is the lowest in the group. A low PEG ratio could indicate that the company is expected to grow at a faster rate than its peers.

And solid growth is what Dollar Tree expects to achieve in the current quarter. It expects to earn between 97 cents and $1.02 in the holiday quarter, ahead of the consensus estimate of 97 cents.

The Takeaway

Dollar Tree shares might have been on a decline for the past few months but now they would probably resume their upward journey. The stock’s decline has made it attractively priced. In addition, Dollar Tree’s focus on store growth and improved product offerings should help drive sales. Moreover, a sluggish economy is another reason why Dollar stores such as Dollar Tree should do well.

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Family Dollar Stores. 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.

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