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Store Initiatives Aid Dollar Tree (DLTR) Amid Cost Woes

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Dollar Tree, Inc. (DLTR - Free Report) has been optimizing its store portfolio through store openings, renovations, re-banners and closings to stay relevant in the current scenario. The company's Key Real Estate Initiatives, including the expanding footprint of the H2, Dollar Tree Plus! and Combo Stores, have been contributing to top-line growth.

Family Dollar H2 stores have been performing well, with about 450 Family Dollar stores renovated to the H2 format in the third quarter of fiscal 2021. It currently has 3,300 Family Dollar H2 stores. In fiscal 2022, the company expects to complete 800 Family Dollar H2 Renovations as part of the Key Real Estate Initiative.

At the Family Dollar banner, the company's newest format — Combo Store — has also been exceeding expectations. Driven by the positive response, Dollar Tree 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. Consequently, it expects 400 new or renovated Combo Stores for fiscal 2022.

Moving on, Dollar Tree's multi-price point Dollar Tree Plus! concept stores, which are part of the Dollar Tree banner, are gaining popularity among customers, particularly discretionary categories. This has helped improve store productivity. The company now plans to accelerate the Dollar Tree Plus! initiative by adding additional 1,500 stores in fiscal 2022. It also expects to have at least 5,000 Dollar Tree Plus! stores by the end of 2024. Dollar Tree currently has multi-price assortments in 600 stores, ahead of its fiscal 2021 target of 500 stores.

Additionally, its Crafter's Square offerings have been performing well. Dollar Tree is expanding its Crafter's Square offerings by bringing in essential and seasonal products.

Driven by these factors, consolidated net sales grew 3.9% in third-quarter fiscal 2021. Enterprise same-store sales (comps) improved 1.6% year over year and 6.7% on a two-year basis. For the Dollar Tree banner, comps were up 0.6% on a constant currency basis, while comps for the Family Dollar banner rose 2.7%.

The company expects fiscal 2021 net sales of $26.25-$26.41 billion compared with $26.19-$26.44 billion mentioned previously. Dollar Tree continues to expect comps growth in the low-single digits.

As a result, shares of this Zacks Rank #3 (Hold) company have surged 60.1% in the past three months compared with the industry's growth of 11.9%.

 

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However, increased freight costs, including higher costs for inland transportation by truck and rail, remain a drag for Dollar Tree. In the fiscal third quarter, the company moved more containers than anticipated, incurring higher-than-expected freight costs.

This led to gross and operating margin contractions of 370 bps and 270 bps in third-quarter fiscal 2021, respectively. The gross margin contracted 470 bps to 30.2% at the Dollar Tree banner and 240 bps to 24.4% at the Family Dollar segment. Segment-wise, the operating margin contracted 420 bps to 8.5% for Dollar Tree and 160 bps to 3% at the Family Dollar segment. Dismal margins, in turn, hurt the bottom line, which declined 30.9% year over year to 96 cents per share in the fiscal third quarter.

Going ahead, management envisions earnings of $5.48-$5.58 per share, down from $5.40-$5.60 per share mentioned earlier. It expects freight and supply-chain disruptions to remain the greatest challenges for the near term.

Bottom Line

All said we believe that the solid top line, led by Dollar Tree's several store initiatives and gains from the transition of the Dollar Tree stores to the $1.25-price point, is likely to offset elevated freight costs.

The Zacks Consensus Estimate for Dollar Tree's fiscal 2021 earnings is pegged at $5.57 per share, marking an increase of 0.7% in the past 30 days. Also, a long-term earnings growth rate of 12.2% drives optimism.

Here's How Other Stocks Fared

We have highlighted three better-ranked stocks in the Retail - Wholesale sector, namely Boot Barn Holdings (BOOT - Free Report) , Tractor Supply Company (TSCO - Free Report) and Capri Holdings (CPRI - Free Report) .

Boot Barn Holdings, the lifestyle retailer of western and work-related footwear, apparel and accessories, currently sports a Zacks Rank #1 (Strong Buy). Shares of BOOT have rallied 45.2% in the past three months. You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Boot Barn Holdings' sales and earnings per share (EPS) for the current financial year suggests growth of 54.4% and 183.3%, respectively, from the year-ago period's reported figures. BOOT has a trailing four-quarter earnings surprise of 35.3%, on average.

Tractor Supply, a rural lifestyle retailer in the United States, currently flaunts a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 22.8%, on average. Shares of TSCO have gained 14.3% in the past three months.

The Zacks Consensus Estimate for Tractor Supply's sales and EPS for the current financial year suggests growth of 19% and 23.9%, respectively, from the year-ago period's reported numbers. TSCO has an expected EPS growth rate of 9.6% for three-five years.

Capri Holdings, which operates membership warehouses, presently carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 1024.9%, on average. Shares of CPRI have gained 14.9% in the past three months.

The Zacks Consensus Estimate for Capri Holdings' sales and EPS for the current financial year suggests growth of 12.6% and 1.2%, respectively, from the year-ago period's reported figures. CPRI has an expected EPS growth rate of 56.4% for three-five years.