Options Trade – Dollar Tree, Inc. (NASDAQ:DLTR) Calls 
Wednesday, August 27, 2014

**OPTIONS TRADE: Buy the DLTR Jan 2015 55.000 call (DLTR150117C00055000) at or under $2.00, good for the day. Place a protective stop limit at $0.80 and a pre-determined sell at $3.50.

by Ian Harvey

August 27, 2014

Introduction

Dollar Tree, Inc. (NASDAQ: DLTR), an operator of discount variety stores offering merchandise at the fixed price, continues to catapult itself to the forefront of the industry by trying to gobble up rival Family Dollar (NYSE: FDO), which applied some pressure to its second-quarter financial results, even without the acquisition -- which isn't a sure thing yet -- it's still a leading player in the discount variety store space that continues to find new ways to grow.

Even if the Family Dollar acquisition doesn’t come to fruition, you can expect to see more Dollar Tree stores being opened, as it plans to develop new formats in new markets and new channels as growth vehicles for the future.

It currently operates 5,166 stores across 48 states and five Canadian provinces, less than half the size of the biggest deep discounter, Dollar General, which runs 11,338 stores in 40 states, and putting it in third place behind Family Dollar, which operates 8,200 stores in 46 states. But management thinks Dollar Tree can eventually support 7,000 stores in the U.S., plus another 1,000 in Canada. CEO Bob Sasser says, "Our goal is to be recognized by customers as the leading retailer in Canada at the single price point of $1.25 just as we are in the U.S. at $1 price point."

It opened 90 new stores in the second quarter, relocating and expanding 20 existing stores, for a total of 110 projects. It closed four stores in the quarter. For the full year, it plans on opening 375 new stores while relocating and expanding 75 additional ones for a total of 450 projects across the U.S. and Canada.

That kind of growth is possible because Dollar Tree is more profitable than the competition. Even as it's given up some points to continue driving traffic, the discount variety chain still stands well above of the competition.

Technical Details

Dollar Tree has a 1-year low of $49.59 and a 1-year high of $60.19. The stock’s 50-day moving average is $54.93 and its 200-day moving average is $53.28. The company has a market cap of $11.158 billion and a P/E ratio of 19.14.

Earnings

Dollar Tree (NASDAQ:DLTR) last announced its earnings results on Thursday, August 21st. The company reported $0.61 earnings per share (EPS) for the quarter, missing the consensus estimate of $0.64 by $0.03. The company had revenue of $2.03 billion for the quarter, compared to the consensus estimate of $2.01 billion.

During the same quarter in the previous year, the company posted $0.56 earnings per share. The company’s revenue for the quarter was up 9.5% on a year-over-year basis. On average, analysts predict that Dollar Tree will post $3.05 earnings per share for the current fiscal year.

“I am very pleased with our second quarter results,” said Chief Executive Officer Bob Sasser. “Expanded assortments of high-value product contributed to our strongest quarterly comparable store sales performance in two years. Pet supplies, hardware, household products, food, electronics and party goods all performed well in the quarter. Our 4.5% comp sales resulted from increases in both customer traffic and average ticket. I am particularly proud of our store associates. Our store teams continue to execute at a high level as the Company delivered its 26th consecutive quarter of positive comparable store sales growth. In challenging macro environments, consumers are increasingly relying on Dollar Tree to be part of the solution in managing their family’s budget. Our stores are well-stocked with incredible values and we are prepared for the fall selling season.”

Summary

• The revenue growth came in higher than the industry average of 5.7%. Since the same quarter one year prior, revenues slightly increased by 7.2%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.

• Dollar Tree Inc has improved earnings per share by 13.6% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, Dollar Tree Inc increased its bottom line by earning $2.75 versus $2.70 in the prior year. This year, the market expects an improvement in earnings ($3.14 versus $2.75).

• The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Multiline Retail industry average. The net income increased by 3.6% when compared to the same quarter one year prior, going from $133.50 million to $138.30 million.

• Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Multiline Retail industry and the overall market, Dollar Tree Inc's return on equity significantly exceeds that of both the industry average and the S&P 500.

• Net operating cash flow has significantly increased by 53.28% to $198.20 million when compared to the same quarter last year. In addition, Dollar Tree Inc has also vastly surpassed the industry average cash flow growth rate of -71.84%.

More Productive

At the same time that Dollar Tree is expanding its footprint it's also making the square footage more productive by expanding the categories offered. Already customers are finding pet supplies, hardware, health, beauty, and eyewear a valuable commodity at the dollar store chain, all of which helped drive its sales higher in the quarter. They also happened to be among the departments seeing the largest comparable sales too.

One way it's helping the customer to find more is by increasing the size of the product sold even though the price point remains the same. And it's bringing in more brand names like Dawn and Palmolive in home goods or Stax potato chips in food and snacks.

Finding bigger sizes or brand name goods cheaply priced ensures customers are going to want to return to buy more. As Sasser says, "throughout the store, we've expanded in more space and more inventory and more of the things that our customers are looking for in a tough time."

Dollar Tree has continued to increase the foot traffic it sees in its stores. No doubt it's because of the greater assortment of goods customers are finding on its shelves, which also happens to have the happy effect of increasing the average ticket (what people spend) in the store.

Analysts Opinions

Dollar Tree could be in a win-win situation, according to analysts at Sterne Agee. If the company's planned purchase of Family Dollar Stores, Inc. (NYSE:FDO) comes to fruition, DLTR's consensus fiscal 2015 earnings estimates could rise 5% to 7%, the brokerage opined. On the other hand, should Dollar General Corp. (NYSE:DG) up the ante and win the heart of the FDO board, Dollar Tree, Inc. can just use its $305 million termination fee and buy stores that DG and FDO may need to put up for sale in order to gain regulatory approval, reports Kevin Kingsbury with The Wall Street Journal. DLTR closed at $54.28 on Thursday, and is down 3.8% year-to-date.

“Putting aside the potential acquisition, we see an additional change in the business model, as we now think the company may be making strategic margin investments to maintain traffic growth at the single-price-point Dollar Tree stores,” writes BMO Capital Markets analyst Wayne Hood, who rates Dollar Tree, Inc.’s Market Perform with a $59 price target (currently $54.26).

Hood points out that if Dollar Tree, Inc. does acquire Family it will jump from about 5200 stores to more than 13,000 immediately, but that the single-price-point that defines the company’s retail strategy will drop from 96% of its store base to just 38%, marking an enormous change in strategy (this is part of the reason some analysts have argued that Family Dollar Stores, Inc. (NYSE:FDO) and Dollar General Corp. (NYSE:DG) are a better strategic fit than Dollar Tree and Family Dollar).

Instead, he sees Dollar Tree, Inc. changing its product mix to keep hitting strong comp numbers and driving store traffic. Since they don’t have any price flexibility, that probably means taking a gross margin hit and facing some short-term headwinds, but Hood believes this is the right course for long-term growth.

The company has been the subject of a number of other research reports:-

• Analysts at Bank of America upgraded shares of Dollar Tree from a “neutral” rating to a “buy” rating in a research note on Monday, August 18th. They now have a $71.00 price target on the stock.

• Separately, analysts at MKM Partners reiterated a “buy” rating on shares of Dollar Tree in a research note on Wednesday, July 30th. They now have a $74.50 price target on the stock.

• Finally, analysts at Johnson Rice downgraded shares of Dollar Tree from an “overweight” rating to an “equal weight” rating in a research note on Tuesday, July 29th.

Dollar Tree has received an average recommendation of “Buy” from the twenty analysts that are currently covering the company, American Banking & Market News reports. Six research analysts have rated the stock with a hold rating and eleven have assigned a buy rating to the company. The average 1-year price target among analysts that have issued ratings on the stock in the last year is $62.34. .

Conclusion

Sales are up, margins are still leading the industry even if Dollar Tree's given up a point or two, comparable sales remain strong, and customers keep coming back, driving up the amount of the basket their buying. Even if it's not successful in acquiring Family Dollar, though at this point the deal seems on track, investors can expect to see Dollar Tree continuing on the growth trajectory they've come to expect.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the DLTR Jan 2015 55.000 call (DLTR150117C00055000) at or under $2.00, good for the day. Place a protective stop limit at $0.80 and a pre-determined sell at $3.50.



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