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Dollar Tree Inc. (NASDAQ:DLTR) reported third quarter earnings per share of 73 cents, beating the Zacks Consensus Estimate of 62 cents and the prior-year figure of 51 cents. The quarter was aided by robust sales attributable to increased traffic and higher average ticket.

The company reported consolidated net sales of $1.43 billion in the reported quarter, a 14.2% increase from the $1.25 billion last year. Comparable store sales increased 8.7% against a 6.5% increase in the year-ago period. Food, houseware, domestic products, party supplies, and health and beauty care products were the top performing categories in the quarter.

Operating income in the quarter was $140.9 million, up from $107.6 million in the prior- year period. Correspondingly, the operating margin increased 130 basis points to 9.9%, reflecting a 20 basis point increase in gross margin and a 110 basis point reduction in SG&A expenses.

Financials

Cash and investments at the end of the quarter were $392.0 million, while long-term debt (excluding the current portions) stood at $250.0 million. The debt-to-capitalization ratio was approximately 15.0%.

In the quarter, Dollar Tree bought back 1.4 million shares for $72.4 million. Year to date, the company has bought back 7.0 million shares for $290.8 million. The company has $469.8 million remaining on its share repurchase program.

Stores

During the third quarter of 2010, Dollar Tree opened 86 stores, expanded or relocated 27 and closed 2. Retail selling square footage increased 6.6% year over year to 34.4 million square feet. As of October 30, 2010, the company operated 4,009 stores in 48 states.

Guidance

For the fourth quarter of 2010, Dollar Tree expects sales in the range of $1.72 billion to $1.76 billion on account of low to mid-single digit positive comparable store sales. Earnings per share are projected in the range of $1.20 to $1.27.

For the full year 2010, the company guides sales estimates in the range of $5.88 billion to $5.92 billion. Earnings are expected between $3.01 and $3.08 per share.

Our Recommendation

We remain optimistic about the company's strategy of building larger stores that can accommodate more consumables/basic merchandise. Dollar Tree stands to benefit from technology investments, innovative marketing and merchandising initiatives, strong inventory management and a healthy financial position.

However, decelerating trends in consumer behavior, strong competition from peers like Family Dollar Stores (NYSE:FDO), 99¢ Only Stores (NYSE:NDN) and Dollar General Corp. (NYSE:DG) and the absence of any significant upside potential keep us apprehensive about the stock in the long term.

Dollar Tree currently retains a Zacks #1 Rank, which translates into a short-term 'Stong Buy' rating. Our long-term recommendation on the stock is Neutral.

Source: Dollar Tree Beats on Solid Q3 Sales