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Dollar Tree (DLTR) Rises on Improved Buy Backs, Store Expansion

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Investors applauded Dollar Tree Inc. (DLTR - Free Report) on its decision to introduce additional multi-price points to its Dollar Tree Plus! stores, plans to expand Combo stores and additional share repurchase commitments. The company’s shares soared as much as 16.5% after the announcement, marking its biggest gain since 2020.

The company announced that it will test additional price points above $1 at certain Dollar Tree Plus! stores before expanding it to all stores. The stores will offer product assortments priced at $1, $3 and $5. The move comes after some customers demanded a broader product assortment. It is progressing well with the target of opening 500 Dollar Tree Plus! stores by fiscal 2021 and 1,500 stores by fiscal 2022. It also plans to expand the Dollar Tree Plus! format to 5,000 stores by fiscal 2024.

The company also noted strong momentum at the Combo Store, which features multi-price assortments. Consequently, it expects the Combo Store to be the key strategic format, anticipating 85% of the newly opened Family Dollar stores to be Combo Stores in fiscal 2022. Dollar Tree currently has 105 Combo Stores and plans to add 400 more by fiscal 2022, with a long-term target of opening up to 3,000 stores.

The aforementioned expansions are part of its Key Real Estate Initiatives, which include the expanding footprint of H2, Dollar Tree Plus! and Combo Stores. The company has made significant progress over the years in optimizing its store portfolio through store openings, renovations, re-banners and closings. In fiscal 2022, it expects to complete 800 Family Dollar H2 Renovations as part of the Key Real Estate Initiative.

The company also raised its share repurchase authorization by $1.05 billion, bringing the total authorization to $2.5 billion. This includes $1.45 billion available for share repurchases under its previous buyback authorization announced on Mar 2, 2021.

In fiscal 2021, the company has bought back shares worth $950 million. It has paid back more than $4 million of debt over the past several years, returning to an investment-grade rating. Driven by its notable free cash flows, the company plans to retain its share repurchasing commitment, which forms a key aspect of its capital allocation strategy.

Overall, we have seen the shares of the Zacks Rank #5 (Strong Sell) company decline 7% so far this year against the industry’s growth of 11.9%. The company’s shares have recently been feeling the pinch of the ongoing industry-wide supply-chain disruptions and elevated freight costs.

 

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Dollar Tree’s outlook for fiscal 2021 assumes the elevated freight cost environment across the industry to continue through the year. The company expects freight costs of $1.50-$1.60 per share for fiscal 2021, higher than fiscal 2020. This is expressed in terms of the extent of the impact on earnings per share. The revised freight cost view includes 60-65 cents per share ($185-$200 million) of additional freight costs versus the previous range issued on May 27, 2021. Per the freight cost guidance provided on the first-quarter fiscal 2021 earnings call, the company’s regular ocean carriers were expected to only fulfill 85% of their contractual commitments. It also assumed higher spot market rates. However, the company now expects regular carriers to only fulfill 60-65% of their commitments.

Dollar Tree also notes that the spot market rates for ocean freight from China have been trending higher than the all-time highs. It stated that the spot rates have increased more than 20% since the last earnings report in May. The company also stated that it expects the volatility in the ocean carriers’ ability to fulfill commitments to continue in the near term, while this is not expected to be a permanent scenario.

Notably, the company’s Dollar Tree banner is extremely sensitive to higher freight costs due to its one-dollar price point. The company is taking several steps to mitigate the impacts of freight and otherwise improve gross merchandise margin. However, the headwinds are likely to affect near-term results.

Management envisions earnings of $5.40-$5.60 per share, down from $5.80-$6.05 per share mentioned earlier. The company expects net sales of $26.19-$26.44 billion for fiscal 2021, with low-single-digit comp growth. For third-quarter fiscal 2021, Dollar Tree expects consolidated net sales of $6.40-$6.52 billion, with comps growth in low-single digits. It anticipates earnings of 88-98 cents per share.

Better-Ranked Stocks to Watch

Costco Wholesale Corporation (COST - Free Report) has a long-term earnings growth rate of 8.6%. It currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The TJX Companies, Inc. (TJX - Free Report) , also a Zacks Rank #2 stock, has a long-term earnings growth rate of 10.5%.

Capri Holdings Limited (CPRI - Free Report) has an expected long-term earnings growth rate of 46.4%. It currently carries a Zacks Rank #2.

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