Over the last few quarters, I have watched with surprise and amusement as several dollar discount stores have been beaten down following less-than-desirable earning reports. Dollar Tree (NASDAQ:DLTR) fell from $49 to $37 after disappointing the Street, while Family Dollar (NYSE:FDO) got hammered from $71 to $55 and Dollar General (NYSE:DG) was carved up from $52 to $41.
The Street really seemed to overreact the few times these essentially terrific business model did not reach the heightened expectations of the analysts — precisely why all three stores have slowly climbed back to respectability since then.
In fact, yesterday, Dollar Tree blew away analysts’ latest earnings forecast, posting earnings per share of $1.01 on revenue of $2.25 billion, while the Street was only expecting 99 cents and $2.23 billion in sales.
When the street realized that Dollar Tree was suddenly undervalued, the stock gapped up. Of course, stocks overall were also boosted by Fed chairman Ben Bernanke’s pledge to Congress to keep interest rates low and continue the stimulus policy, while a stronger-than-expected pending home sales report was another catalyst for upward movement.
But DLTR’s 10.5% gain on the day definitely was helped by the impressive earnings, and also gave a lift to rivals FDO (+2.5%) and DG (+3.6%).
Consumers Bounce Back
In recent months, the media has repeatedly reported that consumers are tightening their belts thanks to the hurricane, several bad winter storms, the Connecticut school tragedy and one political hyperbole scare after another. But like the story of the boy who cried wolf, consumers are shrugging off these “heard it before” political battles and are just trying to shop at retailers who will give them more for their money.
Stores like Dollar Tree are seen by consumers as venues where they can get the everyday household items they need without forking over higher supermarket prices. In addition, from my own experience, Dollar Tree stores are surprisingly pleasant to shop in. They are well-lit and have wide aisles and neatly displayed and organized merchandise. The staff is usually friendly and — unlike stores such as Walmart (NYSE:WMT) or Sears Holdings’ (NASDAQ:SHLD) K-Mart — it is not hard to find a salesperson to help you.
Consumers appreciate these little things, which is why — as I have noted here before — when these stores turnaround, Dollar Tree will be the one to lead them higher. Tough economic times may temper the amounts of money that consumers decide to spend, but a slow economy will also keep them coming back to high-quality discount stores such as Dollar Tree. Ironically, the recent 2% payroll tax hike may help Dollar Tree and the other stocks of this sector, as consumers try to stretch their smaller paychecks for their daily needs.
Chart Signals “Green Light”
The accompanying chart of Dollar Tree looks quite positive as well. With yesterday’s breakout, DLTR appears to be heading over the short-term to the 200-day moving average at $45.59. And unlike many stocks today, it’s not yet overbought and could have plenty of room to advance — especially on any pullback from yesterday’s big gain. The next resistance level would be near $51 — about 12% above yesterday’s closing price of $45.39.
Other bullish signals are evident as well. The MACD has now crossed back above the zero line, and the 50-day moving average has recently bottomed, with even a slight upward curve noticeable.
Plus, in yesterday’s intraday action, the stock also broke through recent resistance levels just under $47, before pulling back to $45.39.
Dollar Tree seems to be heading in the right direction again. With that in mind, owning shares of this company could have you picking your own dollars off the tree very soon.
As of this writing, Ethan Roberts did not own a position in any of the aforementioned securities.