Why Dollar Tree Inc. Jumped 12% in May

By Markets Fool.com

What: Discount retailer Dollar Tree rose 12% in May according to data provided by S&P Global Market Intelligence.

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DLTR data by YCharts.

The rally pushed shares to a new all-time high, up 15% in the last year compared to a slight decrease for the broader market.

So what: Investors cheered the retailer's first-quarter earnings report, released late in the month, which delivered good news. Comparable-store sales rose 3.3% on a constant-currency basis to beat management's forecast due to a mix of rising customer traffic and higher spending per visit.

Image source: Dollar Tree.

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Gross profit doubled as the recently acquired Family Dollar business began contributing to the bottom line. That segment pulled profitability down, though, which is the main reason operating income improved by only 80%.

Yet Dollar Tree's growth was still impressive, given the struggles many full-price rivals are going through. Target, for example, saw its comps slow to 1% over the same period.

Dollar Tree's management says the company has carved out an attractive niche in the industry. "We are part of what I consider, in this economic environment, the most attractive sector in retail," CEO Bob Sasser said in a press release.

Now what: Dollar Tree needs to keep growing at a market-beating pace if it's going to earn the premium investors have assigned to the stock. After last month's pop, shares are valued at 47times trailing 12 months' earnings, compared to 16 times for Wal-Mart, and 13 times for Target.

A key reason for that gap is the fact that Dollar Tree's merger with Family Dollar appears to be progressing smoothly. It involves the combination of over 10,000 stores and two dozen distribution centers, but executives say they're on track to hit all of their targets in a tie-up that's creating the biggest discount retailing specialist in North America. The added scale could power profit growth for Dollar Tree over the next few years, particularly as more shoppers focus on making value purchases.

The article Why Dollar Tree Inc. Jumped 12% in May originally appeared on Fool.com.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.