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Tickers in this Article: DLTR, BRK.A, DG, FDO, NDN
Dollar Tree Stores (Nasdaq:DLTR) posted another quarter of income and sales gains, and although this featured an earnings beat, the market didn't care for the guidance. The market focused on the slowing pace of Dollar Tree's sales growth. (To read more about the importance of growth, check out Steady Growth Stocks Win The Race.)

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Second Quarter Grows Again
Dollar Tree earned $94.9 million, or 77 cents a share, compared to $78 million or 61 cents a share in the year-ago quarter. Consolidated net sales rose to $1.54 billion from $1.38 billion, while same-store sales increased by 4.7 percent. The company cited increases in both customer traffic and higher average ticket. The latter part of the quarter, which ended July 30, was strongest for sales growth. Operating margin grew to 10 percent, an increase of 70 basis points. Gross margins increased 10 basis points, while SG&A dropped 60 basis points. The company cited higher energy costs relative to last year's quarter.

Dollar Stores: A Value and Growth Space
The most recent news in the dollar store space was that legendary investor Warren Buffett has dipped his toe into these investment waters. According to regulatory filings, Buffett's Berkshire Hathaway (NYSE:BRK.A) has bought a nearly 2 million share stake, worth around $50.8 million, in Dollar General (NYSE:DG). The famed value investor's move further confirms to many observers the attractive value aspect of the sector.

Bill Ackman, through his Pershing Capital, has expanded his stake in Family Dollar Stores (NYSE:FDO) to 11.1 million shares, worth around $6.4 million. This is a slight increase from June, when Ackman held 10.9 million shares, according to a regulatory filing. Ackman is the largest shareholder in Family Dollar, which is still a potential buyout. (For more on buyouts, read Understanding Leveraged Buyouts.)

More is at work than value or bargain stocks in this space, however. While it's true the dollar retailers feature low-priced items, often lower than even larger discounters, there is a growth aspect to their business. One analyst sees Dollar General capable of growing earnings in the next four years by around 20 percent. Dollar Tree's earnings have grown by double digits in 13 quarters, with its sales growth of double digits in each of the last nine quarters. Even smaller player 99 Cents Only Stores (NYSE:NDN) has been increasing sales, though its profits in the last quarter barely edged up.

Near Term for Dollar Tree
Dollar Tree's outlook is for Q3 sales in the $1.56 to $1.60 billion range, with EPS from 77 cents to 83 cents. Average analyst expectation was for 82 cents. Full-year EPS was raised to $3.82 to $3.95, up from the previous outlook of $3.69 to $3.85. The view of low single-digit percentage growth for same-store sales for next quarter probably did as much as anything to send share prices down. It will be interesting to see how Dollar Tree and its peers do in the back-to-school trade, as the weak economy may send even more worried consumers their way.

Dollar Stores Center Stage
Dollar stores are here to stay. Once the poor relations of the retail family, they have elbowed their way into a prominent place at the economic table and are eating their fill. They're still displaying a hearty appetite, too. While we may have to wait longer than we thought to see the better economy, which should cement into permanence the demographic changes that brought the dollar stores more middle-income consumers, we won't have to wait to see Dollar Tree and the others keep growing. With a persistently weak economy, Dollar Tree may be vastly understating even its near-term potential. (For back-to-school savings tips, check out 15 A+ Back-To-School Shopping Tips.)

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