It's Tempting To Freak Out About The Economy As Dollar Tree Shares Surge

Dollar Tree (DLTR) this morning reported first quarter earnings, and shares of the company are up about 7%.

The company said that same-store sales grew by 2%, or 1.9% when excluding the impact of the Canadian dollar. Management said it expects its same store sales for 2014 to grow by low-single digits.

Following Dollar Tree's report, dollar store peers Dollar General (DG) is rallying and Family Dollar (FDO) is barely in the green.

It might be tempting to conclude that strength in the dollar stores is a bad sign for the economy. This chart from Family Dollar's January investor conference, paints an interesting picture of what makes these discount retailers go. Family Dollar has seen an uptick in its earnings before income tax, or EBIT, following economic downturns.

Family Dollar

But recent U.S. economic data has painted the picture of an economy that is growing, even if that growth hasn't been as robust as many would expect.

The move higher in dollar store stocks comes during what has been a busy week for retail stocks. The XRT ETF that tracks the S&P Retail index losing about 1% this week, underperforming the S&P 500's 0.8% gain.

In more specific instances, companies in the retail sector have sent investors mixed messages. Luxury retailers Coach (COH) and Tiffany (TIF) saw their shares go in different directions after their most recent reports: Coach sank, Tiffany soared.

High-end organic grocer Whole Foods (WFM) got smoked after its earnings report. But retail giant Wal-Mart (WMT), which has announced clear intentions to drive down the price of organic food, also fell after its results, which disappointed.

So the question for investors is if the economy continues to make incremental improvements, what story is retail really telling, and might discount retailers go from here?

Dollar General is set to report first quarter results on June 3.