By taking a quick look at the company’s financials, we can see that this business model has clearly had a positive impact on consumers and the market. This business has generated sale growths for the last 43 consecutive quarters, which is unique if we compare this with most companies operating in the United States today.
Dollar Tree is a leading operator of discount variety stores, primarily in the United States. It is known for selling all its products at one Dollar.
During the fiscal year of 2017, Dollar Tree reported $11.1 billion in revenue and $1.5 billion in operating income (13.4 percent EBIT margin). These numbers lead to $1.7 million in sales and $220.000 in operating income on average, per each of its 6,650 stores spread across America. By just looking at these numbers we can understand the success rate of this business.
This may indicate that Dollar Tree might be considered the best businesses in the retail sector. This view is mainly supported by its long-term financials.
The company quickly approached $1.5 billion in run rate EBIT during the fiscal year of 2018. If we take out $190 million in net interest expenses, we are left with $1.3 billion in pretax income. After we consider the 20 percent tax rate, we are left with a business that makes a little over $1 billion in after-tax profits.
Currently, the market cap of Dollar Tree is 20 billion Dollars, so that means 20x the earnings. It might be considered as a fair number if we take into account the exposure of its products, the consistency in terms of its financial results throughout the last quarters, and the fact that its products are cheap in comparison to what its competitors offer to the market.
By taking a look at Dollar Tree´s price we might conclude that the Family Dollar business is not reflected on Dollar Tree´s value yet. Therefore, Dollar Tree’s share price may offer a higher price to investors in the near future.
In mathematical terms, this may be one of the perceptions. If we add to this the fact that the United States and China will reach a trade agreement and stop their trade wars, Dollar Tree shares may reach other highs during the first semester of 2019.
Written by Vasco Moura
Vasco Moura, Manager & Market Analyst at TeleTrade Portugal, has more than six years in the finance industry. His prior experience is related to the credit industry, where he worked for one Hedge Fund in London, and for the non-performing loan industry as well. After completing his Bachelors, he worked in Lisbon for one of the biggest asset management companies. He holds an MSc in Financial Markets and Investments.
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