The Real Deal on Wall Street: Throwing Cold Water on Dollar Tree Bullishness

Dollar Tree (DLTR) has officially become the darling dollar store stock on the Street. Over the course of 13-week’s, Dollar Tree shares have appreciated a not so skimpy 18%, and now trade at a not so cheap 19x forward earnings (lofty premium to peer group). On the other hand, the love for the dollar store investment thesis (babyboomers, new unit growth, disposable income trends, food stamps) has definitely not be showered upon the likes of competitors to Dollar Tree; Family Dollar (FDO; -3%) and Dollar General (DG; +7%) have underperformed Dollar Tree in the last 13-weeks.

Wall Street has pushed up their 2012 EPS estimates on Dollar Tree and is envisioning a triple-digit stock price during the next 12-months. Oddly, though, as the Street foresees stronger earnings power out of Dollar Tree going forward, there have been a couple on the sell-side to reduce their same-store sales estimates. Hmm. What gives? Did anyone pay careful attention to the three negative margin related bullet points in Dollar Tree’s 3Q earnings? Couple the bullets that we detail below with two consecutive quarters of slowing year over year comp sales growth, and it suggests there is greater risk to the bullishness surrounding the stock than is being appreciated in the relative premium valuation.

The Real Deal:

• Sales mix is shifting negative (selling lower margin items more frequently) by the company’s own doing; its new, lower margin food offerings in the assortment are turning quickly and eating up a bigger percentage of the sales pie, constraining gross margin potential. This is a fundamental shift in the business.
• Moderating comp growth and higher occupancy costs are not a good combination for a retailer, or for the intelligent investor to invest around.
• Elevated fuel prices will continue to be a headwind in 2012.