Dollar Tree Shares — 3 Pros, 3 Cons

As the economy has slowed, many companies have announced weaker guidance. But
there is one industry that still is robust that is, the deep-discount
retailers. Take a look at Dollar Tree (NASDAQ: DLTR ). The company raised its
full-year earnings-per-share outlook from $3.69-$3.85 to $3.82-$3.95. The
revenue range is expected to be $6.53 billion to $6.62 billion. In fact, Dollar
Tree has posted 20%-plus EPS for 10 consecutive quarters. And yes, the stock
price also has been impressive. The average annual return for the past five
years is 29.33%. But what about the future? Is Dollar Tree still a good
investment? Here's a look at the pros and cons: Pros Strong platform. In the
current tough economic environment, it certainly is attractive to buy products
at a $1 per item. To do this, Dollar Tree imports many items and buys huge
amounts of closeout and promotional merchandise. The company also keeps a large
amount of inventory of consumable items to increase foot traffic. Because of
Dollar Tree's low-price strategy, it has the advantage of getting substantial
economies on volume purchases with its vendors. The company also does not have
long-term purchase contracts and has few inventory markdowns. Refrigerated
products. Over the past few years, Dollar Tree has aggressively installed
freezers and coolers in its stores. In other words, the company will be able to
offer higher-margin products. Also, there should be higher sales volumes.
Website. Dollar Tree's e-commerce strategy is getting traction. So far, the
website has more than 2,200 items and traffic has spiked 38% over the past year.
Interestingly enough, the company also has 100,000 followers on its Twitter and
Facebook pages. Cons Costs. Inflation remains a problem, such as with freight
costs, fuel charges and the cost of merchandise. And since Dollar Tree is a
fixed-price retailer, it does not have the flexibility to hike prices. As a
result, the company must focus on developing efficient systems, which is far
from easy. Competition. The environment is cutthroat. Dollar Tree must deal with
rivals like Dollar General (NYSE: DG ) and 99 Cents Only. At the same time,
there is intense competition from the big-box operators such as Wal-Mart (NYSE:
WMT ) and Costco (NASDAQ: COST ). Economy. True, a slow economy is beneficial to
Dollar Tree. But there still are limits. Basically, if there is a deep
recession, it likely will have an adverse impact on sales. After all, there is
much talk in Washington about cutting benefits. Verdict In a stagnant economy,
Dollar Tree should continue to thrive. The company's stores generate strong
free cash flows, which allow for the internal financing of new locations. It's
a great business model. So it is no surprise that the discount sector has
received interest from some of the world's top investors, such as Berkshire
Hathaway's (NYSE: BRK.A ) Warren Buffett and Pershing Square Capital's Bill
Ackman. Besides, Dollar Tree also is selling at a reasonable valuation of 18
times earnings. So in light of all these advantages, the pros outweigh the cons
on the stock. Tom Taulli is the author of various books, including "All About
Commodities." He does not own a position in any of the stocks named here.