It’s axiomatic on Wall Street: Never bet against the American love affair with shopping. U.S. consumer spending is a growth driver that comes to the fore every holiday season, boosting select retail sector stocks.
Indeed, consumer confidence these days remains strong, but therein lies a paradox: Most Americans think the country is heading in the wrong direction. This mix of confidence and diffidence among consumers is tonic for Virginia-based Dollar Tree, Inc. (DLTR), which operates discount variety stores in the U.S. and Canada in which merchandise is sold at the fixed price of $1.
DLTR’s products run the gamut of household consumables, including toys, food, candy, beauty care, toiletries, stationery — you name it. Importantly as the holidays get into full swing, Dollar Tree emphasizes seasonal offerings.
Dollar Tree is mecca for consumers who want to spend but feel frugal. Major economic indicators are robust, but they’re unfolding amid the highly toxic aftermath of the midterm elections. With talk of impeachment and government shutdowns in the air, political chaos is undermining the public’s faith in the government’s ability to manage the economy.
That said, the recovery is proving resilient enough for consumers to continue making discretionary and holiday purchases. Indeed, consumer confidence beat expectations in November and hit a seven-year high. The Thomson Reuters/University of Michigan preliminary sentiment index increased to 89.4, the strongest since July 2007, propelled by a more robust labor market, lower fuel costs and the prolonged bull market. Nonetheless, 66.2 percent of Americans assert that the country is on the wrong track.
This cognitive dissonance among consumers positions DLTR stock for growth. Three-fourths of the U.S. economy is consumer spending — and 70 percent of consumer spending is conducted during the Thanksgiving and Christmas months. DLTR stock should get a boost in the coming weeks as the nation’s annual shopping spree gets underway in earnest.
Meanwhile, Dollar Tree is in talks to purchase rival Family Dollar Stores, Inc. (FDO) for $8.5 billion. Dollar General Corp. (DG), the No. 1 discount chain, had made a counteroffer for $9.1 billion but was rebuffed by Family Dollar because of antitrust worries. If Dollar Tree’s proposed merger goes through as expected, it would create a deep-discount colossus and further fuel DLTR stock.
DLTR Stock: Glad Tidings
Today before the markets opened, Dollar Tree reported record operating results. For the third-quarter of fiscal 2014, the company racked up earnings per share (EPS) of 69 cents on revenue of $2.1 billion, compared to EPS of 58 cents and revenue of $1.88 billion in the same period a year ago. This beat the consensus expectations of 64 cents in EPS and revenue of $2.06 billion.
Same-store sales jumped 5.9% in the quarter, compared with an increase of 3.1% in the same year-ago quarter, representing the company’s strongest growth in quarterly same-store sales since 2011.
Management provided guidance for fourth-quarter revenue in the range of $2.39 billion to $2.46 billion and EPS in the range of $1.07 to $1.14. Guidance for fiscal year revenue was boosted to a range of $8.44 billion to $8.55 billion
With solid operating results under its belt and rosy predictions for the fourth quarter and full fiscal year, DLTR stock is positioned to be an investment gift that keeps on giving.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
