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Contrarian Retail Stock Speculation: Buy Dollar Tree Stores Inc (DLTR:NASDAQ) at current levels!

Posted January 17, 2008

A Today’s Financial News Research Report:
This company’s new operational structuring will allow it to compete with the larger discount retailers for the more sophisticated bargain-hunting consumer. It may not be replace Target and Wal-Mart as main lower-end retail markets, but it has the strong potential to grow sales as its higher-end competitors see volume decline. — Laura Cadden

by Laura Cadden, TodaysFinancialNews.com

Today’s Financial News feed provides an independent and practical perspective on the U.S. and global investment markets. Subscribe in a Reader or Subscribe via e-mail

Baltimore (TFN): The following is a report based on the latest TFN Hot Stock Pick of the Week video featuring Laura Cadden. (Watch this video)

The time seems to be right for a contrarian retail stock speculation. Economists are predicting economic doom and gloom for 2008. Oil, food, and natural resources are priced higher than ever before. And politicians are busy talking down the past years’ expansion of the American economy to get elected.

Incomes are still up and growing. Household net worth is at historic highs. But we may have reached the point when the widespread perception of impending doom coincidates with a cyclical downturn in the economy.

And in the stock markets, perception is everything.

Evolution of a bargain-basement retailer

There is no definitive indication yet that Americans have stopped spending. While upscale retailer Nordstrom (JWN:NYSE) saw same-store sales decline, Saks (SKS:NYSE) increased same store sales.On the lower end of the spectrum, Wal-Mart (WMT-NYSE) saw sales jump over 2% in December, while Target’s (TGT-NYSE) mixed bag of results comes in at the lower end of expectations.

No time to read? Watch the financial video…

Our favorite discount retailer right now is Dollar Tree Stores Inc. (DLTR:NASDAQ). This Chesapeake, Virginia-based company operates over 3,400 stores in 48 states under various names including Dollar Tree, Dollar Bills, Deal$, and Dollar Express.

In 2007, Dollar Tree strayed from its core strategy of pricing of all items at $1 in its Deal$ stores. Instead, those locations offered items priced up to $5, resulting in average transactions of $9.60 – that’s $2.10 higher that the average at the one-dollar-only stores.

Internal sales growth

The adoption of slightly higher-priced items not just increases the average sale, but could could attract bargain-hunting customers with more disposable income, as well as continue to lead to an increased profit margin.

The third quarter of 2007 saw Dollar Tree’s CFO resign and the stock price sag (right along with the rest of the market). But in the same period, the company reached an agreement to accept Visa credit cards at all their stores, along with debit and Discover cards. Currently, almost a third of their stores also accept MasterCard.

Again, it’s this kind of operational structuring will allow Dollar Tree to compete with the larger discount retailers for the more sophisticated bargain-hunting consumer. It may not replace Target and Wal-Mart as main lower-end retail markets, but it has the strong potential to grow sales as its higher-end competitors see volume decline.

Undervalued potential

Dollar Tree Store’s stock price is currently hovering around $23 – from a 52-week high of $45.98!

Its P/E ratio, of 11.21 compares favorably with Wal-Mart’s 15.4 and Target’s 14.7.

Our recommendation: Take advantage of the discounted price of this discount retailer and buy Dollar Tree Stores Inc. (DLTR:NASDAQ) under $25. We see a 20% upside in the stock to materialize by the middle of the second quarter 2008.

This report is brought to you by Today’s Financial News – the Premier FREE Investment News Service! Subscribe in a Reader or Subscribe via e-mail

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• Retail Stocks: Costco (COST:Nasdaq) is up 19%. Dollar Tree (DLTR:Nasdaq) soars - May 8, 2008

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