Filed Under: , ,
Tickers in this Article: DLTR, FDO, NDN, DG, FRED
Dollars may not grow on trees, it may only seem that way for Dollar Tree (Nasdaq:DLTR), the deep discount retailer which sells plenty of items for $1 or less. With revenue growth of more than 12% and net income increasing by 58%, Dollar Tree had by any measures a spectacular third quarter. Optimistic investors greeted the news with heavy options activity on the stock. Dollar Tree is living in the sweet space of the discounters right now.

IN PICTURES: 8 Tips For Starting Your Own Business

A Group For This Recession

One can argue that the deep discounters such as Dollar Tree, Family Dollar Stores (NYSE:FDO), 99 Cents Only Stores (NYSE:NDN) and the now-public again Dollar General (NYSE:DG) are companies whose business model fit perfectly with this recession. Due to the depth of this downturn, not only have the profits at these discounters been steady if not spectacular, but their business momentum may continue into recovery.

When Things Go Well
Family Dollar recently announced a $400 million stock repurchase plan. On the heels of good earnings, this is at least a vote of confidence by management in its own operations. And operations have been going well, as the company is projected to continue growing earnings by at least 10% next year.

The stock was cited in a recent article as giving nice returns over the last 10 years in the stock market, a period which for the market was essentially flat, while Family Dollar stock gained average annual returns of 7.6%. Those are modest returns, to be sure, but not bad when measured against the market.

99 Cents Only Stores recently had a strong earnings report, profiting from the company's self-described "extreme value" approach and its inroads into the middle-income consumer market. Many of the dollar discounters have described a similar dynamic and it's something they're committed to. And of course, Dollar General's recent IPO is a sign that, if nothing else, the original investors wanted to cash out some in the now higher stock market. Still, the private investors held onto a nearly 90% private stake in the company, so they are banking on its future value.

The Downside
Things aren't looking up for all discounters though. Fred's (Nasdaq:FRED),though not strictly in the dollar store category as a general discount store chain, posted disappointing earnings recently which fell 17%, from 15 cents a share to 13 cents a share in the same quarter year over year. Though revenue was up 1%, the company predicts flat sales for the fourth quarter.

Echoing this theme, Morningstar analyst Zoe Tan commented in a research report that she expects Family Dollar's earnings to slow down, and that Dollar Tree's revenue also will "decelerate long term." She mentioned also the problems 99 Cents Stores are having competing in Texas, a well-known weak area for the company. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Into Recovery
The conventional view is that discounters like Dollar Tree will experience a fall-off in business as the economy improves and consumers return to shopping at less discount-oriented stores. This migrating up, though, is not the sure thing it has been in the past, and some of the numbers coming in better for Dollar Tree and other deep discounters at what most feel is the ending of this recession may be a sign of better things for these stores continuing into recovery. Dollar Tree may not do spectacular business once the recession ends, but look for surprisingly better results than are predicted by most.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center