Dollar Tree Gets Trimmed for Its Dour Outlook

by Marc Bastow | August 17, 2012 12:15 pm

Looks like it’s time to take executives who don’t predict the rosiest possible scenario to task: Witness what happened to discount retailer Dollar Tree (NASDAQ:DLTR[1]) Thursday morning. Second-quarter earnings and revenues came in not just in line with estimates but above them — and yet the shares took a 3.5% pummeling.

What gives? By any measure DLTR banged out at least a double for the quarter:

That’s not too shabby. The problem: Dollar Tree provided a realistic if not totally optimistic peek into next year: 5 cents to 1 cent per share below current estimates in earnings, and $600 million to $200 million below estimates in revenues.

Is this a pattern among the discount retailing segment, or just a blip in what has been a very profitable arena for investors?

Along with competitors Dollar General (NYSE:DG[2]) and Family Dollar (NYSE:FDO[3]), the discount, small store, small market segment[4] has done very well year-to-date:

YTD Return 1-Year Return P/E
DG 23.7% 50.2% 21
DLTR 15.5% 38% 23
FDO 10.4% 24% 18

InvestorPlace Editor Jeff Reeves[5] provided a profile of both the industry and these companies [6]recently, highlighting some of the segment’s problems: lost momentum after FDO announced disappointing earnings last quarter, unpredictable “paycheck cycle” buying patterns and fairly high P/E ratios across the board.

All valid concerns, but this is a segment that promises to be around for the long term because these retailers serve a generally more rural footprint in smaller stores (less expense) and command a strong audience of customers who don’t want to travel to the nearest Walmart (NYSE:WMT[7]) or Target (NYSE:TGT[8]) for bulk or inexpensive items.

What’s more, full economic recovery, whatever that means, is still a long way off, and any dips or slips play right into the hands of DLTR, DG and FDO because consumers will continue to shop for discounts and lower prices.

Dollar General, an InvestorPlace Real America Index[9] component (representing the state of Tennessee[10]), is a small holding in the Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A[11], BRK.B[12]), portfolio. So, investors have a least a little comfort in the company’s fortunes.

FDO adds a little bit of a kicker with a small (84 cents per share) annual dividend, providing some extra yield (currently 1.31%) to the returns.

Both DG and FDO have yet to announce most recent earnings, with DG due Aug. 27 and FDO not out until September. So, investors will have to wait a little longer to determine whether Dollar Tree’s lowered guidance is a one-company event, or an early warning for the segment.

I remain a fan of all three, and I suspect their customers feel the same way, too.

Marc Bastow is an Assistant Editor at As of this writing he does not hold a position in any securities mentioned here.

  1. DLTR:
  2. DG:
  3. FDO:
  4. the discount, small store, small market segment:
  5. Editor Jeff Reeves:
  6. a profile of both the industry and these companies :
  7. WMT:
  8. TGT:
  9. InvestorPlace Real America Index:
  10. state of Tennessee:
  11. BRK.A:
  12. BRK.B:

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