Updated Research Report on Dollar Tree - Analyst Blog

We issued an updated research report on Dollar Tree Inc. DLTR following the company's dismal fourth-quarter fiscal 2013 results.

The disappointing show by Dollar Tree in the fourth quarter reflected from earnings per share and sales falling short of the Zacks Consensus Estimate. Moreover, margins remained under pressure due to higher operating expenses from ongoing investments to strengthen its omni-channel selling strategy.

The company reported earnings of $1.02 per share, below the Zacks Consensus Estimate of $1.05. Revenue declined by a marginal 0.5% on a year-over-year basis in the quarter to $2,234.9 million and fell short of the Zacks Consensus Estimate of $2,278.0 million.

Further, given the challenging economic environment, management took a cautious stance while providing sales and earnings guidance for the upcoming quarter and fiscal 2014. This wary outlook triggered a downtrend in the Zacks Consensus Estimate. The estimate for first-quarter fiscal 2014 fell 2.9% to 67 cents while for fiscal 2014, it fell 4.3% to $3.14 per share.

However, we remain impressed by the company's fabulous comparable store sales performance that reflects growth. The company's comps in fiscal 2013 remained robust despite unfavorable macroeconomic conditions mainly due to competitive pricing and strategic store expansion plans, including remodeling and relocations.

Fiscal 2013 represented the 8th consecutive year of positive comparable-store sales, with comps increasing 2.4% for the year. For fiscal 2014, Dollar Tree expects comps to increase in the low single-digit range.

Additionally, we believe the company is progressing well with its growth endeavors like store expansion strategies, omni-channel growth, revamping of store formats and venture into new markets. We also commend its strategic investments toward incorporating technological enhancements focused on boosting its top and bottom line in the long run.

Further, the company remains well positioned among the leading dollar stores, especially with its evolving multi-price point chain. We applaud the company's focus on expanding market share by increasing its store size to accommodate more consumables/basic merchandise as well as leveraging an extensive network of stores to effectively penetrate into its target markets.

During fiscal 2013, the company opened 343 new stores and relocated 71 stores while it increased square footage by 6.9% to 43.2 million. For fiscal 2014, the company plans to open about 375 stores and renovate, expand, or relocate 75 stores while increasing its square footage by 7.0%.

Moreover, we believe that the company's sustained focus on price management, cost containment, inventory management, product mix offering and merchandise initiatives will boost its sales and margins further. Further, Dollar Tree's accelerated share repurchase program reflects management's confidence in the business and consistency of its cash flow generation ability.

Currently, Dollar Tree carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Other stocks worth considering in the sector are American Apparel Inc. APP, Foot Locker Inc. FL and Hanesbrands Inc. HBI, all of which carry a Zacks Rank #2 (Buy).