The Iconoclast Investor

With the economy bad and likely to get a lot worse (the leading economic indicators are all shouting severe recession), retail stocks have been crushed, especially those that offer discretionary (read: expensive) items.  Any company selling HDTVs or fancy jewelry or expensive apparel has seen its stocks crushed in recent months.

However, the pain being felt by those companies is benefitting many discount retailers-those that sell basic goods and services at bargain basement prices.  One of the best of the bunch is Dollar Tree (DLTR), which was featured in Cabot Top Ten Report on November 3.

“With the economy weak and getting weaker, retailers like Dollar Tree are not only holding their own, they’re actually showing accelerating growth as consumers flock for bargains. (Family Dollar Stores (FDO), featured in last week’s Cabot Top Ten Report, is in the same sector.) Dollar Tree sells a variety of basic consumables, including gift bags, candy, stationery, housewares, seasonal decorations, toys, party supplies and even beauty products. And as its name suggests, most of the products sell for a buck! The company has 3,500 stores nationwide, so it’s pretty much expanded as much as it’s going to in the U.S. But solid management and the economic climate have helped push up growth rates–revenues, though up just 13%, marked their fastest growth in five quarters. And earnings are expanding at a 20% clip, and should surprise on the upside going forward.”

Adding to the positive vibes was the company’s quarterly report, released Tuesday morning.  Third quarter sales rose 12% to $1.11 billion (same-store sales actually grew 6.2%), while earnings gained a solid 20% to 47 cents a share, three cents above expectations.  CEO Bob Sasser said, “We are gaining new customers and increasing market share.  More people are shopping at our stores and they’re buying more when they visit.”

Dollar Tree is not a great growth company–it’s not the next Apple (AAPL) or First Solar (FSLR).  But it is in the right place at the right time, and the stock has etched a solid launching pad in the last couple of months.  Shares nearly broke to new highs on Tuesday following the report.  I believe the stock can bring you profits if the market’s bounce can turn into something longer lasting.