Amidst the COVID-19 pandemic, a lot of companies have been slammed by falling demand caused by the ensuing global economic downturn. Not every company has been a victim, though. Some have managed to benefit from the crisis. This is especially true for low-cost players in necessary markets. One of the great examples (perhaps the greatest example in the retail space) here is Dollar Tree (DLTR), the massive chain of discount stores that owns bother Dollar Tree and Family Dollar brands. Surging sales so far in 2020 and the ensuing strong earnings and cash flow make it appear as though the crisis has been a boon for the brand. At present, shares seem to be reasonably priced as well, at least on a forward basis, so this may be the best time for investors to consider buying into the business.
An excellent year so far
At present, the situation investors in Dollar Tree happen to be experiencing should be positive. After all, the COVID-19 pandemic has proven to be quite positive for the business. Take, for instance, the third quarter of its current fiscal year. According to management, sales came in at $6.18 billion. This is up 7.5% over the $5.75 billion seen the same time last year. A rise in store count, from 15,262 at the end of the third quarter last year to 15,606 has most certainly helped, but the situation is better than that. Management has also posted strong comparable store sales. In this quarter, enterprise same-store sales came in 5.1% above where they were a year earlier. The company’s Family Dollar brand has done even better, rising by 6.4%, and its flagship Dollar Tree brand has risen by 4%.
As same-store sales rise, so too should profit margins. And sure enough, that is precisely what we are seeing. Net income in the latest quarter came out to $330 million. This is 29% higher than the $255.8 million seen in the same time last year. This expansion resulted in the firm’s net profit margin rising from 4.45% to 5.43%. Though this may not seem like much, the margin expansion will translate to an extra $9.8 million in profits for each $1 billion in sales the company brings in.
This strong improvement hasn’t been just associated with Dollar Tree’s latest quarter. It has been an all-year thing. In fact, the third quarter was weaker than the year as a whole has been. According to management, sales in the first three quarters of the year came out to $18.74 billion. This is 8.4% higher than the $17.30 billion seen a year earlier. Enterprise same-store sales are up an impressive 6.5%, while its Dollar Tree brand has seen sales rise a more modest 2.1%. Where the business is really excellent, though, was when it came to its Family Dollar locations. Management decided, for 2020, to renovate 750 of its Family Dollar locations. These stores usually see comparable results rise by 10% or more relative to stores that don’t see such renovations. This has helped to push Family Dollar same-store sales up 11.2% compared to 2019.
Just as in the case with the latest quarter, the increase in store count and rising same-store sales has helped Dollar Tree grow its bottom line nicely. Net profits year-to-date came out to $839.1 million. This is 19.2% higher than last year’s $704 million. The end result here was net profit margin expansion from 4.07% of sales to 4.48%. So long as the company continues to successfully renovate locations and grow its physical footprint wisely, this trend should continue.
There are other ways to look at the company’s profitability as well. Operating cash flow, for instance, came in at $1.73 billion for the first three quarters this year so far. This is up significantly over the $1.01 billion seen in the same three quarters a year earlier. Having said that, there were significant changes in working capital that we should adjust for. Doing this, operating cash flow did rise, but from $1.30 billion to $1.48 billion for an increase of 13.9% year-over-year.
Moving forward, there is some uncertainty for the business. Management cited COVID-19 as a key factor that could affect its future results. But while the picture for the business has been strong so far this year, even management said that the uncertainty makes it impossible to reliably forecast what the fourth quarter will look like. Using operating cash flow and assuming that the fourth quarter will look much like last year’s, though, we can get some glimpse into what might be alright anticipating. Doing this, it looks like operating cash flow for 2020, on an adjusted basis, might be around $2.15 billion. This would be 13.9% above the $1.89 billion seen in 2019 on an adjusted basis. Using the company’s current market cap of $26.4 billion, this implies a price/operating cash flow multiple of 12.3 for the firm. This isn’t cheap, but it’s far from being expensive as well.
Not only is this multiple fairly attractive, it’s likely that Dollar Tree’s financial condition will only continue improving over time. This year, for instance, the firm expects to open a further 480 stores relative to last year. More likely than not, a similar number will be opened up next year too. With sales per store of around $1.5 million, this implies an annual run-rate sales of $720 million. That’s without factoring in historical same-store sales growth of between 1.7% and 2.1%.
Even this figure is likely to be greater next year if the renovations associated with Family Dollar stores are any indication. That’s because, while the company will have only renovated 750 of those locations this year, it plans to renovate 1,250 next year. That should help same-store sales even more. On a forward basis for 2021, it may not be unreasonable to see the company’s multiple from today’s price dip to 11.
Right now, Dollar Tree is an interesting company that has been a real growth machine in recent years. This year has been especially positive for the firm, with same-store sales soaring and management able to add on nicely to the business’s store count. At present, shares look reasonably priced and so long as the business continues to fare well, it’s likely that its long-term prospects should provide some upside potential for investors moving forward.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.