The Tycoon Report

A Bum Rap for Dollar Tree?

Can you imagine owning a Dollar Tree? What a joy it would be to go outside in the morning sun and pick the money fruit off the green leaves of the tree, perhaps as many dollars as you would need for any given day!

And what a great name for a company! Who wouldn't love a name that symbolizes a company growing its branches season after season, with money hanging from the leaves?

Well right now, Wall Street does NOT love the Dollar Tree Store (DLTR), and they are doing a major pruning to its price! The stock has been trounced in the last three months, dropping 40% from a September intraday high of 44.12, to the current price of 26.63. OUCH!

According to AOL, "Dollar Tree operates about 3,300 discount stores in 48 states, selling a changing mix of housewares, toys, seasonal items, food, health and beauty aids, gifts, and books -- all priced at $1 or less. About 40% of its merchandise is imported, primarily from China; closeouts represent less than 15% of its inventory. Dollar Tree Stores are located in high-traffic strip centers anchored by mass merchandisers and supermarkets, as well as in small towns."

Back in the autumn, things were looking good, with an announced 500 million dollar buy back and a new policy of accepting VISA cards. Even Jim Cramer was pounding the table bullishly on DLTR. But suddenly the CFO announced he was leaving the company for another job, and the leaves began falling off the tree! And then on November 8th, came this announcement:

Dollar Tree Stores, Inc. (NASDAQ:DLTR), the nation's largest $1.00 discount variety store chain, reported total sales for its fiscal third quarter of 2007 were $997.8 million, a 9.6% increase compared to $910.4 million in last year's fiscal third quarter. Comparable-store sales for the quarter increased 1.9%.

On first read, that doesn't sound too bad, but the numbers fell short of the analysts' expectations. And you know what happens then. Look out below!

So today, poor little Dollar Tree sits at 26.63, unloved and unwanted. The technicals look awful, but I would like to make a case for this company, and state that DLTR is getting a bum rap. These are the fundamentals:

Current PE is 13.4,

Forward 12 month PE of 12.

The PEG is 0.92.

1 Year Earnings Per Share Growth Rate is 11.6%.

Price/Sales is 0.79

Price/Book is 3.38

Gross Profit Margin is 34.19%

Operating Profit Margin is 7.84%

Net Profit Margin is 4.84%

These numbers compare very favorably with the S&P 500, whose PE is currently over 20, and with other industry competitors. Their profit margins are better than Wal-Mart, and yet Wal Mart stock has by far outperformed Dollar Tree as of late.

The 2nd Quarter numbers of 0.33 per share was in line with consensus. The expectations for the 3rd Quarter, due out on November 28, are for 0.37 per share. Dollar Tree estimated it will post earnings between 35 and 38 cents per share. Their earnings history is pretty darn good and their actual EPS always seems to meet or exceed expectations, but could the street be expecting a miss this time?

CNBC.com has an article this morning previewing holiday retail winners and losers. About Dollar Tree, they write:

"They'll be hurt by those lower-income households that have fewer dollars in their pockets because it's being sucked up into the gas tank," said Frank Badillo, senior economist at TNS Retail Forward.

And yet, about other discounters, they write,

"On the other hand, the quest for cheap gasoline could bring costumers to warehouse clubs like Costco Wholesale and Wal-Mart's Sam's Club", Badillo said.

In my view, this is nonsense. When times are tough, people look to save money on the items that they need. If a toothbrush or shampoo costs $3 at Walgreens, but only a buck at Dollar Tree, the people from lower income households know where they need to shop.

Furthermore, most of the gas pumps at Sam's Club and other discounters are on the outskirts of the parking lot. People stop there on the way home from work to fill up, but they do not necessarily go into the store after that.

In comparison to the other dollar stores, such as Family Dollar and Dollar General, Dollar Tree seems to have the cleanest, nicest looking stores, and best customer service. I have personally used the Peter Lynch method of visiting several different dollar stores over time to confirm this.

I do not presently own Dollar Tree stock, having sold my shares when the slide began. However, I am looking forward to re-buying it when I feel the bottom is in place. There are technical problems. It has been hitting 52 week lows, is well below all the moving averages, and the volume is still too heavy on the downside for my liking. But with indicators like RSI at 18 and Full Stochastics at 1.72/2.69, DLTR is at very oversold levels, and is at least due for a short term trading bounce.

One would be prudent to wait until the next earnings report before buying any shares for the long term. If in fact they do miss the analysts' expectations, the stock could stagnate or drop even lower. But I love the Dollar Tree Store, and perhaps it will not be too long before Wall Street sees the error of its ways.

And when that day comes, I will once more walk in the green meadow, with the sunny skies, and pluck the dollar bills from the Dollar Tree!