Dollar Tree - Solid Operational Performance And Consistent Share Repurchases Create Value

| About: Dollar Tree, (DLTR)


Dollar Tree reports solid growth, driven by store openings and a slow pace of comparable store sales.

The company navigated well with its inventory in a difficult environment.

The biggest plus are consistent share repurchases, creating long-term returns for investors.

Dollar Tree (NASDAQ:DLTR) released its first-quarter results which were solid and triggered a relief rally over the past week. Shares trade at reasonably fair multiples, yet the consistent and long-term pace of share repurchases creates value for long-term investors.

Solid First Quarter Results

Dollar Tree reported first-quarter revenues of $2.00 billion, up 7.2% on the year before. Sales results were driven by new openings while comparable store sales growth of 2.0% was solid as well given the difficult market circumstances.

Reported net earnings came in at $138.3 million, up 3.6% compared to last year. As a result of sizable share repurchases, Dollar Tree managed to significantly accelerate earnings per share growth. Earnings came in at $0.67 per share, up 13.6% compared to last year.

Looking Into The Results

The 2.0% reported comparable sales growth was solid driven by both traffic and average ticket prices. Discretionary products sold well, better than consumables which comes as a little surprise given the continued pressure on the middle and lower class. Notably seasonal merchandise for Valentine's day and Easter performed well.

Despite the sales growth, Dollar Tree faced pressure on gross margins which fell by 40 basis points to 34.8% of sales. This margin compression was offset by a similar reduction in operating costs which fell to 23.2% of sales resulting in flat operating margins of 11.6%.

Looking Into 2014

Sales for the current quarter are seen at $1.97 to $2.02 billion being in line with the first-quarter results. The company anticipates low single-digit positive comparable store sales which should result in earnings of $0.58 to $0.64 per share.

Annual sales are forecasted at $8.37 to $8.54 billion. The outlook is based on low single-digit comparable store sales growth with annual earnings foreseen at $2.94 to $3.12 per share. No additional share repurchases are anticipated within this guidance.

Consensus estimates for full-year results stood at earnings of $3.17 per share on revenues of $8.51 billion.

Dollar Tree's Valuation

The company ended the first quarter with little over $387 million in cash. Total debt stands at $757 million, resulting in a net debt position of $370 million.

Important to notice during these difficult days for the retail industry, inventories were up by just 3% to $1.04 billion.

Trading around $53 per share, Dollar Tree's equity is valued at $11 billion. This values equity in the business at roughly 1.3 times annual revenues and roughly 18 times annual earnings.

Dollar Tree does not pay a dividend, instead it favors share repurchases to return cash to its shareholders.

Returning Cash

Over the past year, Dollar Tree returned a billion through share repurchases while the pace of repurchases slowed down to 1.9 million shares over the past quarter.

After the quarter has ended the company has repurchased another 1.2 million shares with a current $1 billion in repurchases being authorized at the moment.

The company has a long-term track record of repurchasing back its own shares with the number of shares outstanding decreasing by roughly 40% over the past decade. The company did so even in the difficult years when the share price was low, providing excellent value for money for current investors.

Implications For Investors

Shareholders were pleased despite the fact that the company guided for slightly lower revenues and earnings than analysts were foreseeing.

Despite the difficult circumstances, Dollar Tree opened 94 new stores during the quarter, while relocating and expanding another 28 stores to end the quarter with 5,080 stores. For the full year some 450 projects which include expansions, openings and relocations are planned in the US and Canada.

The company continues to foresee room for a 1,000 Canadian stores as well as 7,000 stores within the US. Besides expanding its physical presence, Dollar Tree has furthermore 4,000 items being online. Online traffic were up by 19% compared to last year.

The company is a perfect example why investors should not simply consider growth in revenues or earnings, but instead focus on metrics per share over the long haul. Note that the continued repurchases of shares has not impaired its balance sheet which is fairly healthy while operations growth at a healthy pace as well.

Unfortunately shares have boomed in recent years just like the wider market. That being said, I might contemplate taking a position in the $45-$50 area if shares might witness a correction going forwards.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.