Sector financial performance:

This company, primarily a discount retailer selling consumables, seasonal items, and home products and apparels, has been grouped into discount stores sector in retail industry.

It seems that demand for products and service of companies in this sector has been very strong as indicated by growth the same store sales (average 3-4% annual growth rate) in the past several years, which can be attributable more on increasing transaction size (mark-o) than increasing transaction counts. Growth has also come from expansion of reach of stores. It seems that traffic was able to quickly catch up in newly opened stores. The lower pricing items seem to have been less impacted by unfavourable retail industry climate, as characterized by slowing down traffic in the stores, than higher pricing items. It seems that the traffic may be slowing in 2018 as indicated by smaller increase or decrease in transactions and thus the smaller comparable sales growth in 2018 compared with 2017.

As a result of lower merchandise costs and rising mark-on, we have seen about 150 basis points increase in gross margin from the typical companies (around 34% in 2018). The typical operating margin is now at about 13% (with a large range of 8-23%) with a SG&A as percentage of sales of about 21%. The average operating margin seems to go down slightly in 2018 probably due to lese mark on resulted from pressure of slowing traffic.

The typical average stock Price/cash flow ratio is: 25(interest/EBI ratio of 15%) and stock price/sales ratio is about 2.0.

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Company performance:

It seems that the demand for products/service of this company (mainly $1 items) in the past several years has been strong as indicated by the continuing increase in comparable sales (both in transaction size and traffic) and its successful expansion by opening new stores  during the same period of time.

The first half of 2018 compared with the same period of 2017

Net sales for Dollar Tree increased about 7.6% (7% for 2Q).

Dollar tree same store sales increased 3.9% (3.7% for 2Q) due to increase in transaction size and in traffic.

Family dollar same store sales decreased 0.5% (0% for 2Q) due to decrease in traffic.

The 2017 compared with 2016

Net sales for Dollar Tree increased 10%.

Dollar tree same store sales increased 3.4% due to increase in both transaction size and traffic.

Family dollar same store sales increased 0.4%.

2016 compared with 2015

Net sales for Dollar Tree increased 8.6%.

Dollar tree same store sales increased 1.8%.

2015 compared with 2014

Net sales for Dollar Tree increased 8.5%.

Dollar tree same store sales increased 2.5%.

Its gross margin has been down to around 32% in 2017 from about 35% since 2014 due to product mix’ shifting to lower margin as a result of acquisition of family dollar offset by lower merchandise costs and higher mark-on. With slight decrease in SG&A as percentage of sales (around 23%) as a result of decreased labor costs, its operating margin went down to about 9% in 2017. The gross margin continued to be down in 2018 to about 31% and with slightly improved SG&A% the operating margin went down below 9% in 2018

Stock price

This stock currently has an enterprise price/EBI ratio of 20 ($85). We think that its stock is being relatively fairly valued compared with its peers.