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Dollar Tree Inc. (DLTR - Analyst Report) reported robust results for the third quarter of fiscal 2012. The company’s quarterly earnings of 51 cents per share came in ahead of the Zacks Consensus Estimate of 49 cents.

Moreover, it outperformed the year-ago earnings of 44 cents per share, registering an upside of 15.9% year over year. The solid results came on the back of higher sales and improved margins.

Quarterly Details

Dollar Tree's total revenue grew 7.8% in the quarter to $1.721 billion from $1.597 billion in the prior-year quarter. Higher sales were primarily driven by new store additions and an improvement of 1.6% in comparable store sales (comps) over the prior-year period comps of 4.8%. However, total revenue was slightly below the Zacks Consensus Estimate of $1.727 billion.

The company's quarterly gross profit climbed nearly 7% year over year to $599.6 million. However, gross margin contracted 20 basis points (bps) to 34.9% primarily due to increased input costs.

Operating income for the quarter bolstered 11.7% to $184.2 million. Operating margin came in at 10.7%, up 40 bps from the year-ago period, primarily benefiting from a contraction in selling, general and administrative expenses as a percentage of sales.

Balance Sheet

Dollar Tree ended the third quarter with cash and cash equivalents of $222.4 million compared with cash balance of $280.2 million at the end of the prior-year quarter. The company had an outstanding long-term obligation of $250 million as of October 27, 2012.

Merchandise inventories were up 12.7% year over year to $1.133 billion, which reflects the company’s preparation for holiday season sales. During the first nine months of fiscal 2012, the company spent $236.7 million on capital expenditure.

Share Repurchase

During the quarter, the company bought back 3.3 million shares for about $148.9 million. At the quarter end, Dollar Tree had shares worth $965 million remaining under its share buyback program.

Store Update

In the quarter, the company further expanded its stores network by opening about 111 stores, shutting down 4 stores and relocated 16 stores. This brings the company’s total store count to 4,630 in 48 states and 5 Canadian Provinces.

Looking Ahead

For the fourth quarter of fiscal 2012, Dollar Tree expects total sales in the range of $2.20 billion to $2.26 billion on the back of flat to low-single-digit same-store sales growth. Further, the company anticipates earnings in the range of 97 cents - $1.02 a share in the upcoming quarter.

For fiscal 2012, the company anticipates sales to reach the $7.35 billion - $7.41 billion range. It projects earnings in the range of $2.45 - $2.54 per share for fiscal 2012, excluding a gain of 16 cents from the sale of Ollie’s.

Our Take

Dollar Tree is considered as one of the best-positioned dollar store concepts, especially with its evolving multi-price point chain. We believe that the company is doing a commendable job internally by managing controllable inputs, including reducing stem miles, while increasing back-haul opportunities.

The company continues to generate robust same-store sales growth, indicating its focus on low-priced wants and needs commodities. The rise in comparable sales is attributable to augmented traffic, reflecting continued top-line growth.

Additionally, the company’s strong free cash flow generation signals an enhanced share buyback program, as the company, apart from stores growth, uses majority of the free cash flow to buyback shares.

However, we remain slightly cautious on the stock due to sluggish economic recovery and high unemployment and household debt level, which may restrain consumers from spending more. Therefore, we are maintaining a long-term ‘Neutral’ recommendation on the stock. Moreover, Dollar Tree has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

Dollar Tree operates as a discount retailer of general merchandise in the southern, southwestern, midwestern, and eastern United States. The company is in direct competition with Dollar General Corporation (DG - Analyst Report) and Family Dollar Stores Inc. (FDO - Analyst Report).

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