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Dollar Tree to Split Stocks 2-for-1

Zacks Equity Research

Leading discount stores operator, Dollar Tree Inc. (DLTR) announced its intention to split its common stock to improve its liquidity while also enhancing shareholder value. Per the split announcement, the company will distribute two shares to shareholders for every single Dollar Tree share held as of the close of business on June 12, 2012.

The new shares under the 2-for-1 stock split will be distributed as a stock dividend on June 26, 2012. This will increase the company’s total shares outstanding to 232 million shares from the current (pre-split) outstanding shares of 116 million.

Dollar Tree’s stock split announcement reflects the company’s commitment to enhance long-term value for shareholders. On the other hand, the stock dividend will also enhance the company’s liquidity. Moreover, it will provide avenues to enter new positions at attractive prices while boosting the demand for the company’s shares, and ultimately broadening its shareholder base.

Additionally, the company’s strong free cash flow generation signals an enhanced share buyback program, as the company, apart from stores growth, uses majority of free cash flow to buyback shares. Further, the company’s recently announced accelerated share repurchase program reflects management’s continued confidence in the business and the consistency of its cash flow generation.

Dollar Tree ended first-quarter 2012 with cash and cash equivalents of $382.3 million compared with cash balance of $371.3 million at the end of the prior-year quarter. The company had no outstanding long-term obligations as of April 28, 2012. Merchandise inventories were up 13.5% year over year to $875.0 million. In the first quarter of 2012, the company spent $65.4million on capital expenditure.

We believe the company is doing a commendable job internally of managing controllable inputs, including reducing stem miles while increasing back-haul opportunities. The company continues to generate robust same-store sales growth, which reflects its focus on low-priced wants and needs commodities. The rise in comparable sales is attributable to increased traffic, reflecting continued top-line growth.

Functioning as a discount retailer of general merchandise in the southern, southwestern, mid-western, and eastern United States, Dollar Tree is in direct competition with Dollar General Corporation (DG) and Family Dollar Stores Inc. (FDO). Currently, Dollar Tree has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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