Dollar Tree Has Good News, But Faces Serious Resistance

Sep.20.13 | About: Dollar Tree, (DLTR)

By Neal Rau

Big retail discounters like Wal-Mart Stores, Inc. (WMT), Target Corporation (TGT) and Macy's, Inc. (M) have been struggling to find consumers who are willing to spend. However, Dollar Tree, Inc. (DLTR) has been able to attract bargain shoppers into its stores in the U.S. and Canada. The company just announced a $2 million stock buyback, while the stock is trading near yearly highs, so should investors be buying or selling shares?

Dollar Tree reported that its net sales for the second quarter, 2013 were $1.85 billion, an increase of 8.8%, from the second quarter of 2012. Net sales increased by 11.5%, or $7.4 billion, compared to a year earlier. Impressive numbers when you consider Wal-Mart and Target have been cutting numbers.

Dollar Tree is not just out selling the big retailers, the company is also beating its peers like Dollar General Corp. (DG) and Family Dollar Stores, Inc. (FDO) this year too. While Dollar Tree's comps grew 3.7% in the recent quarter, Dollar General showed 2.6% growth, and Family Dollar was at 2.9%, proving management's acumen, pushing the stock to 52-week highs, and within striking distance of long-term resistance according to the Stock Traders Daily trading report. That presents both a positive and a negative case, and as an investor, we must ask ourselves what is more important. Does price matter more than news, or vice-versa?

What is more impressive is that Dollar Tree is the smallest of its peers, in terms of store count with 4,842 stores. Family Dollar has more than 7,600 stores, while Dollar General's has over 10,000. This suggests that Dollar Tree still has as a lot of room to expand its business, and management believes that there is potential for 7,000 stores in the U.S. and 1,000 stores in Canada, much more than the current 160 Canadian stores.

In addition to adding stores, Dollar Tree believes frozen and refrigerated products will lead to increased traffic, and will drive sales across all categories, which includes higher-margin items, so it has been aggressively installing coolers and freezers in stores. Dollar Tree now has almost 3000 new stores with frozen and refrigerated products. The company has remodeled its checkout lanes and expanded assortments across the front end of the stores to drive impulse sales.

Dollar Tree continues to grow in the U.S. and Canada, while maximizing profits in its existing stores. However, price matters, and the stock is up 42% YTD and near a test of long-term resistance. If the stock tests resistance, and remains below resistance, as defined in our real time trading report, Stock Traders Daily expects lower levels and a test of support. That would make DLTR a sell/short at resistance, with risk controls defined as a break above resistance. Our profit target is support by rule, and if that happens, DLTR may actually be a buy at that time as well, but not now, not as it tests resistance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Neal Rau for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.