Is Dollar Tree a Value Addition to Your Portfolio at the Moment? - Analyst Blog

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On Sep 11, 2014, we issued an updated research report on Dollar Tree Inc. ( DLTR ), following the company's impressive second-quarter fiscal 2014 results as its top and bottom lines improved year over year.

The discount variety store operator's adjusted earnings of 61 cents per share for the quarter were 8.9% higher than the year-ago comparable quarter's earnings of 56 cents. However, adjusted earnings were below the Zacks Consensus Estimate of 65 cents per share.

Revenues increased 9.5% on a year-over-year basis in the quarter to $2,031.1 million and came ahead of the Zacks Consensus Estimate of $2,011 million. The improvement was driven by robust sales in both consumables and discretionary products. Comparable-store sales (comps) increased 4.5% on a constant currency basis primarily driven by improved traffic, coupled with a rise in average ticket.

We believe, Dollar Tree is progressing well with its growth endeavors, including store expansion, omni-channel development, revamping of store formats and venture into new markets. Further, we are confident that the company will continue to implement strategies such as increasing consumables mix, rolling out of freezers/coolers at stores and multi-price point expansion to boost top-line performance.

Recently, Dollar Tree entered into an agreement to acquire Family Dollar Inc. ( FDO ). The giant that will rise from the combination of these two companies will be strong enough to single-handedly counter competition from retail bellwethers such as Wal-Mart Stores Inc. ( WMT ) and Dollar General Corporation ( DG ), in the dollar-discount store segment. The combined chain, with an ability to generate sales of over $18 billion, will be in a better position to reach out to more value seeking consumers through its vast network of more than 13,000 stores spanning across 48 states and five Canadian Provinces.

Furthermore, the acquisition will enhance the buying power of the pair, providing better negotiating terms with suppliers. The combined company will be able to offer broader and multiple assortments at more compelling prices. Moreover, the transaction will help in achieving operational and distributional efficiencies as well as cost synergies.

However, we are slightly cautious about the company's future results due to rising freight costs, which is continuously weighing on its gross margin performance. In the recent quarter, the company's gross margin remained a weak spot due to reduction in merchandise margin, higher freight costs and increased investment in higher-value products.

Moreover, the stock remains vulnerable to sluggish economic recovery and cautious consumer spending. Also, risks of sourcing merchandise from overseas markets may drag the company's results going forward. Thus, the company currently carries a Zacks Rank #3 (Hold).

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FAMILY DOLLAR (FDO): Free Stock Analysis Report

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DOLLAR GENERAL (DG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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