Wednesday, August 27, 2008

Dollar Tree – Is It an FX Play?

Dollar Tree Inc. (DLTR) reported some excellent results. Their press release headlines a 27.3% increase in EPS. Sounds good. No really it’s great, most companies would kill to be able to say something like that. President and CEO Bob Sasser said “Our performance in the second quarter demonstrates the growing relevance of Dollar Tree to the consumer during tough economic times,”

The comment begs the question: How relevant will you be when everyone gets their financial mojo back? Despite that S&P maintains their buy rating on Dollar Tree. Wonder if the rating is an inverse economic forecast of the overall US economy?

No mention of the complexity of managing a huge number of stock keeping units. The company does feel it has reduced shrinkage which of course is positive for margins.
At the price points Dollar Store operates at most of the stock keeping units are manufactured off shore and subject of the influences of Foreign Exchange rates. This company is becoming a back door foreign exchange play. How have they hedged that problem?

Do investors understand that aspect of the risk premium for this stock? Management is not pointing out this issue.