Discount retailer Dollar Tree, Inc. (NASDAQ:DLTR) has been impressive this year, as robust strategies and terrific execution have helped it outperform its peers. However, there was a blemish in the recently reported second-quarter results, as Dollar Tree, Inc. (NASDAQ:DLTR) failed to meet analysts’ estimates by a whisker and issued a light guidance .
But shares rose 2.5% after the report, which probably indicates that investors have faith in the company’s long-term prospects, which is why there was no panic selling. Going forward, Dollar Tree, Inc. (NASDAQ:DLTR)’s strategies further indicate that the company is moving in the right direction, and shareholders should stick with it for the following reasons.
Better than peers
Dollar Tree, Inc. (NASDAQ:DLTR)’s same-store sale growth has outperformed peers Dollar General Corp. (NYSE:DG) and Family Dollar Stores, Inc. (NYSE:FDO) this year, and the story continued in the latest round of results. While Dollar Tree’s comps grew 3.7% in the recent quarter, Dollar General Corp. (NYSE:DG) had witnessed 2.6% growth, and Family Dollar Stores, Inc. (NYSE:FDO) was at 2.9% .
While there might not be a big disparity in same-store sale growth, a look at the following chart will reveal the true picture.
DLTR Gross Profit Margin TTM data by YCharts
Dollar Tree’s gross margin has held its own, while others have witnessed a decline. The reason behind this is pretty simple. Both Dollar General Corp. (NYSE:DG) and Family Dollar Stores, Inc. (NYSE:FDO) are focused on driving more traffic to their stores by selling more consumables. They are focusing on tobacco and other low-margin products to increase revenue.
Family Dollar’s sales had increased 9% in the previous quarter, and Dollar General Corp. (NYSE:DG) clocked sales growth of 8.5%. In comparison, Dollar Tree, Inc. (NASDAQ:DLTR)’s top line grew 8.8% in the previous quarter — impressive without selling tobacco.
However, sales of lower margin products are adversely affecting the bottom line, as the chart above shows. Family Dollar Stores, Inc. (NYSE:FDO)’s net income was down 3% in the previous quarter, while Dollar General Corp. (NYSE:DG) has made it a habit of cutting down its guidance this year. Dollar Tree hasn’t followed suit, and management remains against selling tobacco products.
Earlier this year, CEO Bob Sasser said the following about selling tobacco, “It’s bad for you, and also bad for our margins.” Instead of taking the easy route to grow sales, Dollar Tree has other strategies that look good.
Growth strategies
Dollar Tree, Inc. (NASDAQ:DLTR) is the smallest of the lot in terms of store count with 4,842 stores. Family Dollar Stores, Inc. (NYSE:FDO) has more than 7,600 stores, while Dollar General Corp. (NYSE:DG)’s count exceeds 10,000 . This indicates that Dollar Tree has a lot of room to expand its business, and management believes that there’s potential for 7,000 stores in the U.S. In addition, Dollar Tree sees potential for 1,000 stores in Canada–way greater than the 160 stores at present .
