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Dollar Tree Tops Estimates

Zacks Equity Research

Dollar Tree Inc. (DLTR) reported a robust first-quarter 2012 with earnings of $1.00 per share, surging above the Zacks Consensus Estimate of 98 cents per share. Quarterly earnings also outperformed the year-ago earnings of 82 cents per share, registering an upside of 22% year over year. Higher sales and improved margins benefited Dollar Tree to post solid first-quarter results.

Quarterly Details

Dollar Tree's total revenue grew 11.5% in the quarter to $1,723.6 million from $1,545.9 million in the prior-year quarter, outpacing the Zacks Consensus Estimate of $1,697 million. Higher sales were primarily driven by robust growth in comparable store sales of 5.6% over the prior-year period comps of 7.1%.

Revenue also benefited from solid performance at the company’s Home products; Food, snacks and beverage; Health care products; Party supplies; Household cleaning supplies; and Seasonal merchandise.

The company's quarterly gross profit climbed 11.4% year over year to $602.7 million, while gross margin remained flat at 35.0%. Operating income for the quarter grew 16.3% to $188.0 million. Operating margin came in at 10.9%, up 40 basis points from the year-ago period, primarily benefiting from a contraction in selling, general and administrative expenses as a percentage of sales.

Balance Sheet

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.

Share Repurchase

During the quarter, the company concluded its $300 million Accelerated Share Repurchase program and bought back additional 49 thousand shares for about $4.5 million. At quarter end, Dollar Tree had shares worth $1.2 billion remaining under its share buyback program.

Store Update

During the reported quarter, the company further expanded its stores network by opening about 110 more stores, shut down operations of 10 stores and relocated 44 stores. This brings the company’s total store count to 4,451 stores in 48 states and 5 Canadian Provinces.

Looking Ahead

For the second quarter of 2012, Dollar Tree expects total sales in the range of $1.66 billion to $1.70 billion on the back of low-to-mid single-digit same-store sales growth. Further, the company anticipates earnings in the range of 87 cents to 93 cents a share in the ensuing quarter.

For fiscal 2012, the company anticipates sales to reach $7.33 billion to $7.46 billion range, driven by a low-to-mid single-digit growth in same-store sales. The company sees earnings in the range of $4.74 to $4.94 per share for fiscal 2012.

Our Take

Dollar Tree is considered one of the best-positioned dollar store concepts, especially with its evolving multi-price point chain. 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, indicating its focus on low-priced wants and needs commodities. The rise in comparable sales is attributable to increased traffic, reflecting continued top-line growth.

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 operates as a discount retailer of general merchandise in the southern, southwestern, midwestern, and eastern United States. The company is in direct competition with Dollar General Corporation (DG) and Family Dollar Stores Inc. (FDO).

Currently, Dollar Tree has a Zacks #2 Rank, implying a short-term Buy rating on the stock. Besides, the company retains a long-term Neutral recommendation.

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