Dollar Tree Stock – Leave DLTR Behind

Advertisement

I’ve been high on the dollar stores like Dollar Tree, Inc. (NASDAQ:DLTR) for a long time. It took me awhile to overcome a prejudice, though, because when I first bought a bunch of items at a 99-cent store back in the early 1990s, the quality of products was clearly substandard.

Dollar Tree NASDAQ:DLTRSo, I watched from the sidelines as Dollar Tree took off and never really looked back. Dollar Tree rose six-fold from 1995 to 2006 and eight-fold since then. By the time 2010 rolled around, I realized what a fool I had been. I had made a judgment about one chain, applied it to all, including Dollar Tree, and let it sit for twenty years.

Since then, all the chains started carrying name-brand merchandise. They expanded with smart use of capital. They exploded after the financial crisis as people sought out cheaper ways to live.

In the past few years, however, we’ve seen a lot of mergers and acquisitions, which is usually a sign of slowing growth. Private equity took out some big chains, which usually means private equity thinks it can bring more efficiency to the businesses so they can generate the cash flow.

Dollar Tree won the battle for Family Dollar Stores, Inc. (NYSE:FDO), but the merger isn’t complete yet. In the meantime, growth has indeed been slowing.

Dollar Tree stock’s first-quarter sales increased a healthy 8.8% to $2.18 billion from last year’s $2 billion. Dollar Tree same-store sales increase came in at 3.4%. Dollar Tree stock’s gross profit increased 7.5% to $749 million from $700 million, but margin declined by 40 basis points.

DLTR net income came in at $69.5 million and 34 cents per share, and after backing out the costs associated with the FDO purchase, diluted earnings rose 6% to 71 cents per share.

Like many retailers with any kind of presence on the west coast, numbers were hurt by the labor actions at various west coast ports. Nevertheless, even if things had been normal, DLTR is not the growth stock it was a few years back. That’s when we were seeing 15% increases in earnings per share and high single-digit same-store sales increases.

DLTR is projecting fiscal year 2015 sales of $9.24 – $9.42 billion, which is a $30 million increase over the previous estimate. Net income is expected to come in between $3.32 and $3.47 per share, an increase of 2 cents.

The balance sheet is not what it once was, but that’s because Dollar Tree had to draw down about $7 billion in debt to fund the FDO purchase. Whereas DLTR had $864 million in cash and $683 million in debt as of the end of January, the cash position hasn’t changed much while debt is now $7.82 billion.

This saddles DLTR with about $500 million in annual interest payments, which might not bother me if I thought the FDO purchase was a good idea. I’m not crazy about it, as far as Dollar Tree stock is concerned. While we might expect to see some synergies and efficiencies, the sad truth is FDO has crappy cash flow. Family Dollar had only $33 million in free cash flow in fiscal year 2014.

But worse, FDO has 2.8% margins versus the DLTR margins of 10.5%. FDO focuses on urban and rural poor demographics, whereas DLTR is more suburban. DLTR paid $8.7 billion, or almost 33 times earnings for a company that wasn’t growing fast enough or with margins large enough to justify the purchase.

In every dollar store face-off I ever wrote, DLTR stock was undefeated. Dollar Tree stock won every match with ease on every metric, but no more. I think its time to sell out of DLTR, and move on to something else.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/dltr-dollar-tree-stock-fdo/.

©2024 InvestorPlace Media, LLC