Has Dollar Tree, Inc. (DLTR) Become the Perfect Stock?

Throughout much of the slow recovery in the economy in the past several years, deep-discount retailers have performed exceedingly well. By selling low-cost but high-margin merchandise, Dollar Tree, Inc. (NASDAQ:DLTR) and rivals Family Dollar Stores, Inc. (NYSE:FDO) and Dollar General Corp. (NYSE:DG) have managed to carve out a highly lucrative niche for themselves, taking away business from slightly higher-end discounters Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT).

But aggressive expansion plans from Dollar General and Family Dollar have raised the threat of a saturated market for deep discounters, and that has kept their shares down recently. Moreover, macroeconomic effects from high gas prices and the reimposition of the full Social Security payroll tax at the beginning of 2013 have reduced the amount of disposable income that Dollar Tree, Inc. (NASDAQ:DLTR)’s core shoppers have to spend, and that could continue to have an impact on revenue and profitability going forward.

In its most recent quarter, Dollar Tree managed to top analyst expectations on both revenue and earnings, posting a 2.4% increase in same-store sales, and managing to show substantial improvement on its operating margins. Even though the company’s 2013 guidance fell somewhat short of the consensus among those following the stock, Dollar Tree’s stock soared as investors gave a sigh of relief that things weren’t far worse.

For Dollar Tree, Inc. (NASDAQ:DLTR) to improve, it needs to hope for just the right combination of sluggish economic growth to keep its customers both able to spend, but unable to upgrade to higher-end retailers. Unless it can manage that balancing act, Dollar Tree, Inc. (NASDAQ:DLTR) could continue to face challenging times ahead.

The article Has Dollar Tree Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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