Dollar Tree Stores (Nasdaq:DLTR) continued its blistering performance, as net income soared to new records on strong sales. Customers kept finding their way to the dollar discounter, as it showed substantial increases in most of its important metrics.

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Strong Results
Consolidated net sales rose from $1.35 billion in the first quarter 2010 to $1.55 billion in this year's quarter. Traffic was up 5%, while average spending was up 2%, according to CEO Bob Sasser in the conference call. Net income increased to $101 million from $63.6 million. EPS rose to 82 cents from 49 cents.

Same store sales rose 7.1% from last year's first quarter. Last year's first quarter saw a 6.5% increase in comparable store sales from that year's previous quarter, so strong sales momentum continues. Operating margin increased to 10.5% from 7.6% in the year ago quarter, a 290 basis point increase. The company beat estimates, raised guidance and continues to grow.

Dollar Discounters Sought After
Leonard Green & Partners offered $19.09 per share in March for 99 Cents Only Stores (NYSE:NDN), but the stock has been trading above the offer price since. With net cash, the offer price values the discounter at $1.1 billion, or 7.9 times EBITDA. This would be one of the cheapest deals in the discount space since 2005, when Sun Capital bought Shopko for 6.1 times EBITDA, according to Bloomberg. Observers don't feel the deal for 99 Cents Only will get done at that price. FBR Capital Markets (Nasdaq:FBCM), which owns 3.8 million shares, opposes the deal.

A Merger in the Dollar Space?
Dollar Tree has been mentioned as another possible bidder for 99 Cents Only. These two might be a good fit, as Dollar Tree and 99 Cents sell many items at a single price point, while 99 Cents would offer more grocery exposure. Dollar Tree is increasing its grocery offerings, including frozen foods, and accepts food stamps in many of its stores, strengthening its appeal to low-income customers. Family Dollar (NYSE:FDO) and Dollar General (NYSE:DG), despite having the designation "dollar store," sell many items at prices in excess of the $1 or less price point.

Other Dollar Deals
Nelson Peltz's Trian Fund Management offered what would be in the 9 times next year's EBITDA range for Family Dollar, with a $7.7 billion offer that has been rejected. Whether that offer will be hiked up or another will be forthcoming from somewhere else, it's clear that the dollar discounters are considered hot properties on the Street.

Dollar Tree's Prospects
Dollar Tree forecast fiscal year earnings per share of $3.69 to $3.85, up from a range of $3.55 to $3.76 given in February. Analysts were looking for $3.76. It could hit sales of $6.5 billion to $6.63 billion this year, up from an earlier forecast of $6.43 billion to $6.6 billion. The company still expects same-store sales to rise in a low to mid single digit percentage range this year.

During the quarter, Dollar Tree opened 83 stores, closed seven and expanded or relocated 41 stores. Dollar Tree, which has over 4,000 stores, would be able to support twice that many by one analyst's account. Deals or no deals, Dollar Tree keeps growing.

Bottom Line
Dollar Tree stock reflects strong investor interest, so it's not a buy-low stock right now, but it's clear that the dollar discount story is far from over. Investors would do well to watch Dollar Tree for an opportunity to buy.

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Tickers in this Article: DLTR, NDN, FBCM, FDO, DG

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