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Shares of Dollar Tree (DLTR) rose 2.9% over the past week. The operator of discount variety stores operating under the names of Dollar Tree, Deal&, Dollar Giant and Dollar Bills, among others, reported its third quarter results on Thursday.

Third Quarter Results

Dollar Tree reported third quarter revenues of $1.72 billion, up 7.8% on the year before. Comparable store sales rose 1.6% on the year, a slowdown compared to the growth rate of 4.8% in 2011. Revenues came in slightly below analysts consensus of $1.73 billion.

Gross margins fell 20 basis points to 34.9% on higher input costs. Operating margins rose 40 basis points to 10.7% on positive sales leverage, among others.

Net earnings rose 49% to $155.4 million. Diluted earnings per share rose 58% to $0.68 per diluted share. Excluding the impact of the sale of Ollie, earnings per share rose 19% to $0.51 per share, beating analysts consensus by two cents.

At the end of the quarter Dollar Tree operates 4,630 stores up from 4,335 in the third quarter of 2011.

The company repurchased 3.3 million shares for a total consideration of $149.8 million during the quarter, for an average price of roughly $45 per share. Year to date, Dollar Tree has repurchased 5 million shares for $235.3 million. At the end of the quarter, Dollar Tree has $965 million left under its current share repurchase authorization.

CEO Bob Sasser commented on the results, "Sales increased in both basic and variety categories. Comp store sales were positive every month and we saw sequential improvement from August through October. Operating margin increased significantly and the company delivered record third quarter earnings per share."

Outlook

For the fourth quarter of its fiscal 2012, Dollar Tree guides for sales of $2.20-$2.26 billion. The guidance assumes flat to low-single digit comparable sales growth. Diluted earnings per share are expected to come in between $0.97 and $1.02 per share.

The outlook is in line with analysts expectations which expected Dollar Tree to earn $0.98 per share on revenues of $2.24 billion.

The guidance implies full year sales of $7.35-$7.41 billion. Diluted earnings per share are expected to come in between $2.65 and $2.70 per share. Earnings are boosted by the sale of Ollie's, which adds $0.16 per share in earnings. The fact that 2012 has 53 working weeks adds $120-$130 million in sales and $0.07-$0.08 in earnings per share.

Valuation

Dollar Tree ended its third quarter with $222.4 million in cash and equivalents. The company operates with $264.3 million in short and long term debt, for a modest net debt position of $42.1 million.

For the first nine months of 2012, Dollar Tree generated revenues of $5.15 billion. The company net earned $390.7 million, or $1.69 per diluted share.

The market currently values Dollar Tree at $8.8 billion. This values the firm at 1.2 times annual revenues and roughly 15-16 times annual normalized earnings.

Dollar Tree does not pay a dividend.

Investment Thesis

Year to date, shares of Dollar Tree have fallen some 6%. Shares started the year at $41 per share and steadily rose to $57 in June of the year. A weaker outlook in October send shares back to levels around $39 at the moment.

Shares rose from lows of $8 in the beginning of 2008 to all time highs of $57 this year. Shares have fallen back some 30% from those levels. Between 2008 and 2012, the company grew its annual revenues from $4.6 billion to an estimated $7.4 billion this year. Earnings rose from $230 million to an estimated $555 million this year.

The company retired roughly 15% of its shares outstanding during the time period, thereby boosting earnings per share from $0.84 in 2008 to an estimated $2.45 in 2012.

Dollar Tree operated in a favorable environment for the discount store operator. A weak economy and high unemployment put a strain on shoppers budgets. These factors resulted in higher traffic in Dollar Tree's stores looking for bargains as discretionary spending has been under pressure. The company furthermore added food in its assortment to boost sales.

In August of the year I took a look at the prospects for Dollar Tree. Shares were trading some 15% from their highs at the moment and I urged investors to wait for another 15% correction to pick up some shares. Shares have seen this second part of the correction and long term holders could buy on this dip, given the strong record of Dollar Tree over the past decade.

Source: Dollar Tree - A 30% Sell-Off Creates An Interesting Entry Point