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DLTR Is a Bargain Hunters’ Best Friend

The tough thing about being the world’s No. 1 discount retailer is there are always companies that are looking to steal your business.

DLTR Is a Bargain Hunters' Best FriendIn North America, Wal-Mart Stores Inc (NYSE:WMT) is having a hard time fending off low-priced competitors Dollar General Corp. (NYSE:DG) and Dollar Tree, Inc (NASDAQ:DLTR).

Since the recession hit in 2008, many shoppers have been looking for the best deals on mechandise. Where they once just bought everything from a big-box retailer, they shifted their shopping and spending patterns and began to buy more for price than convenience.

This has been a boon for DG and DLTR. And gaining ground on WMT has reinvigorated these bargain-bin retailers to the point where earlier this year they both went after Family Dollar Store Inc (NYSE:FDO).

While DG’s offer to acquire Family Dollar was better in dollar terms, it would have required the company to close up to 4,000 FDO stores to keep federal regulators happy. DLTR’s offer was less lucrative, but required the closure of only 330 stores to get approval of the Federal Trade Commission.

When FDO shareholders put it to a vote, they chose the DLTR deal.

By July the companies will have officially merged and just this week DLTR identified the 330 stores it will close as part of the deal.

The continued growth in this space has been significant and it’s likely that until the economy is going great guns once again, DLTR will grow its base and continue to have a healthy return. Now that consumers’ buying patterns are set, it’s going to take significant economic shifts to change their patterns, especially on the goods that they purchase at DLTR stores.

This trend was reinforced with the release of its most recent quarterly numbers last week.

Bottom line: Sales remain strong, the company should get about $45 million for the FDO store sales and as long as free cash flow remains strong, the market has its back.

Net sales were up 8.8% to nearly $2.2 billion in the first quarter, an increase from $2 billion in the same quarter a year ago. Same-store sales (a crucial metric in the retail space) increased 3.4%, compared to a 2% increase in the prior-year period.

Sales and earnings were hurt by two unique factors: the port strike in California and the $8 billion acquisition of FDO.

Four of DLTR’s 10 distribution centers were directly affected by the West Coast port congestion, which hurt sales. As for earnings, DLTR announced earnings of 71 cents per share, compared to the Street’s estimate of 74 cents. It was also nearly a 50% decrease compared to the same quarter of the previous fiscal year.

But no one is running for the exits.

DLTR’s short interest stands at 13.2 million shares and actually has decreased by 4% from the same period of last month. That means even with the hard sales and earnings numbers, the institutional money is staying long.

Also bolstering this bullish news, Cantor Fitzgerald initiated coverage on DLTR with “buy” rating on April 21, with a price target at $96. That’s almost a 30% upside from where the stock sits now.

Given the fact that the economy is still in a one-step-forward-two-steps-back phase, the stage is set for DLTR to continue to grow same-store sales and start to knock down its acquisition debt.

This will be the crucible moving forward; whether it can generate the cash flow to service the debt and continue to grow its business. But given the fact that DLTR is up 265% in the past five years despite tough economic times, this company has a strong track record of finding opportunity and exploiting it.

Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip GrowthEmerging GrowthUltimate GrowthFamily Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/05/dltr-is-a-bargain-hunters-best-friend/.

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