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Dollar Tree Too Deeply Discounted


Wednesday's sell-off may have been premature.

On Wednesday, deep-discount retailer Dollar Tree (DLTR) disseminated its second-quarter earnings. In the period ended August 2nd, the Virginia-based company reported a bottom line of $37.6 million or $0.42 per share.

That was a nice jump from the $32.6 million or $0.33 per share it booked in the same period last year, and north of the $0.33 to $0.36 guidance it offered in conjunction with its first-quarter earnings. It was also a penny ahead of what the Street had been looking for.
Comp store sales rose a healthy 6.5%, despite what I would call a tough comparison. In fact, in last year's second quarter its comps were up an impressive 4.4%.

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Its SG&A line also came in at 27.6% of sales, which was a 50-basis point improvement over the 28.1% it saw in the comparable period last year.

Unfortunately, there was a downside to the story as well. In conjunction with its earnings, the company said that "full-year sales are now forecasted to be in the range of $4.61 to $4.68 billion, based on low-to-low-mid single digit positive comparable store sales for the full year...Diluted earnings per share are expected to be $2.33 to $2.43."

Now, some Dollar Tree bulls may argue that this is good news, insofar as the company had previously been looking for EPS of $2.23 to $2.39. However, it's still shy of the $2.44 a share the Street had been expecting, and that shouldn't be ignored.

I think management may be playing it conservatively: That is, the $2.44 a share number might actually be doable. The comp store sales number gives me hope, as does its operating margin, which edged up 10 basis points in the quarter over the comparable period last year. I'm also encouraged by its sales number, which in the latest quarter rose a healthy 12.5% from the same period last year.

In short, folks, I realize that the forecast may have been disappointing to some - but I can't help but think that Wednesday's sell-off was a bit overdone.

Dollar Tree closed at $37.94, down $1.24 or 3.16%.
No posiitons in stocks mentioned.

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