Dollar Tree Inc. (DLTR) reported second quarter earnings per share of 61 cents, beating the Zacks Consensus Estimate of 54 cents and the prior-year result of 42 cents. The quarter was aided by robust sales attributed to increased traffic and higher average ticket.

In the second quarter, Dollar Tree executed a 3-for-2 stock split in the form of a 50% common stock dividend.

The company reported consolidated net sales of $1.38 billion in the reported quarter, a 12.7% increase from the $1.22 billion last year. The result also surpassed the Zacks Consensus Estimate of $1.34 billion.

Comparable store sales increased 6.7%, against a 6.8% increase in the year-ago period.

Operating income in the quarter was $127.8 million, up from $89.2 million in the prior- year period. Correspondingly, the operating margin increased 200 basis points to 9.3%, reflecting a 60 basis point increase in gross margin and a 140 basis point reduction in SG&A expenses.

Financials

Cash and investments at the end of the quarter were $480.3 million, while long-term debt (including the current portions) stood at $266.5 million. The debt-to-capitalization ratio was approximately 16.2%.

Year to date, Dollar Tree bought back 5.6 million shares for $218.4 million. This also included Accelerated Share Repurchase of $200 million, which was completed in early August.

The company has $542 million remaining on its share repurchase program Incorporatedluding the additional $500 million authorized by the company’s Board of Directors in June 2010.

Stores

During the second quarter 2010, Dollar Tree opened 56 stores, expanded or relocated 34 stores and closed 5 stores. Retail selling square footage increased 6.8% year over year to 33.6 million square feet. As of July 31, 2010, the company operated 3,925 stores in 48 states.

Guidance

For the third quarter of 2010, Dollar Tree expects sales in the range of $1.35 billion to $1.39 billion on account of low to mid single digit positive comparable store sales. Earnings per share are projected to be in the range of 57 cents to 62 cents.

For the full year 2010, the company guides sales estimates in the range of $5.77 billion to $5.86 billion. Earnings are expected between $2.97 and $3.09 per share.

Our Recommendation

Based in Chesapeake, Virginia, Dollar Tree, through its subsidiaries, is engaged in the ownership and operation of discount variety stores in the United States. The company offers merchandise (including candy, food, housewares, health and beauty care products) at the fixed price of $1.00 in the U.S.

We remain optimistic about the company’s strategy of building larger stores that can accommodate more consumables/basic merchandise. Dollar Tree stands to benefit from technology investments, innovative marketing and merchandising initiatives, strong inventory management and a healthy financial position.

However, decelerating trends in the consumer behavior, strong competition from peers like Family Dollar Stores (FDO), 99¢ Only Stores (NDN) and Dollar General Corp. (DG) and the absence of any significant upside potential keep us apprehensive about the stock in the near term.

Dollar Tree currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

Zacks Investment Research

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