A sluggish economy and high unemployment have reduced the purchasing power of middle-income consumers in the United States. With tightened purse strings, shoppers have been on the hunt for deals. This has worked in favor of discount retailers in the U.S., as demand for their bargains has risen.
Discounters make the most of conditions
Dollar stores have been stealing business away from larger stalwarts such as Wal-Mart (NYS: WMT) and Target (NYS: TGT) because of their heavily discounted offerings and convenient locations. Deep discounters such as Family Dollar (NYS: FDO) posted robust quarterly figures with profits rising 8% as higher demand pushed up revenues by 9.1%. Peer 99 Cents Only (NYS: NDN) saw earnings jump 17% in its most recent quarter thanks to improved same-store sales and declining expenses as a percentage of revenue.
Now Dollar Tree (NAS: DLTR) , which sells products priced at less than a dollar, made the most of the economic conditions as profits rose 12%, or $0.87 a share, trouncing estimates of $0.83. Let's dig a little deeper.
A brief look at the numbers
Increased store traffic and higher average ticket values played their part in pushing up revenues. Same-store sales also rose an impressive 4.8%. This only builds on last year's impressive 8.7% increase.
Retailers this year have been hit by higher input costs; however, Dollar Tree has been surprisingly resilient in the face of this. One would expect these macro trends to make things more difficult for Dollar Tree, as they have a $1 ceiling on their item prices and can't easily transfer higher input cost. However, despite a rise in commodity costs, Dollar Tree was still able to maintain gross margins at 35%. Net income also rose 12% at $104.5 million.
As a result of the strong quarterly performance, Dollar Tree boosted its year-end outlook. It now expects to earn between $3.94 and $4.01 per share, up from the earlier estimated $3.82 and $3.95. The company branched out by opening 98 stores last quarter, plus it also expanded/relocated 24 stores. This pushed total store count up at 4,335 stores in the U.S. and Canada. To stay up to date on deep discounters and see if Dollar Tree continues to rake in the dollars, click here.
At the time thisarticle was published Fool contributor Shubh Datta doesn't own any shares in the companies listed above. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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