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Here's Why Dollar Tree (DLTR) is Marching Ahead of Industry

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Dollar Tree Inc. (DLTR - Free Report) looks well-poised in a tough industry, driven by its store initiatives, including store growth plans and initiatives to boost store productivity. The company has been recently gaining from the completion of the $1.25 multi-price point initiative at the Dollar Tree stores, as well as robust margins, despite the increase in freight costs and SG&A expenses. Also, the company’s Combo store and H2 renovation initiatives bode well.

Driven by store initiatives as well as measures to control costs, the company reported the 10th straight quarter of earnings beat in first-quarter fiscal 2022. The top line also beat estimates. Both earnings and sales improved year over year. Enterprise same-store sales (comps) improved 4.4% year over year. Gains from improved initial mark-on, favorable product mix at Dollar Tree banner, and distribution and occupancy cost leverage boosted the gross margin.

Shares of this Zacks Rank #2 (Buy) company have risen 61.9% in the past year against the industry's decline of 0.2%. The stock also outpaced the sector’s and the S&P 500’s declines of 47.9% and 5.7%, respectively, in the past year.

 

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Factors Aiding Growth

Dollar Tree has been optimizing its store portfolio through store openings, renovations, re-banners and closings to stay relevant in the current scenario. It is delivering compelling results for its Key Real Estate Initiatives, which include the expansion of its $3 and $5 plus assortment in Dollar Tree stores, as well as Combo Stores. It also remains on track with H2 Renovations at the Family Dollar stores. Consequently, the company outlined plans to accelerate its key initiatives in fiscal 2022 and beyond.

In fiscal 2022, Dollar Tree expects to complete 800 Family Dollar H2 Renovations as part of the Key Real Estate Initiative. Out of this, 190 will be Dollar Tree stores and 400 will be Family Dollar stores. Within the Family Dollar stores, 350 stores will be in the Combo Store format. Also, management intends to expand the $3 and $5 Plus assortments to more than 1,500 Dollar Tree stores. It expects at least 5,000 Dollar Tree Plus! stores by the end of 2024.

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. The company currently has 3,300 Family Dollar H2 stores. In fiscal 2022, Dollar Tree expects to complete 800 Family Dollar H2 Renovations as part of the Key Real Estate Initiative.

Moreover, the company completed the rollout of its $1.25 price point initiative to every Dollar Tree store across the United States in February 2022, more than two months ahead of schedule. The move will enable Dollar Tree to reintroduce some customer favorites and traffic-driving products, which were discontinued earlier due to the $1 pricing constraint. Driven by the $1.25 initiative, the company expects increases in comps, sales and gross margin.

Dollar Tree’s restructuring and expansion initiatives, as evident from steady store openings and improvement of distribution centers, are likely to drive revenues. In first-quarter fiscal 2022, Dollar Tree opened 112 stores, expanded or relocated 33 outlets, and shuttered 30 stores. The company completed the renovation of 118 Family Dollar stores to the H2 or Combo Store formats. Additionally, it expanded the multi-price plus offerings to another 790 Dollar Tree stores in the quarter. As of Apr 30, 2022, the company operated 16,162 stores in 48 states and five Canada provinces.

In fiscal 2022, the company expects to open 590 stores, consisting of 400 Family Dollar and 190 Dollar Tree stores. It also plans 1,500 Dollar Tree Plus additions and 800 Family Dollar H2 Renovations. The company is on track to reach its long-term target of operating 26,000 stores, with more than 10,000 Dollar Tree and 15,000 Family Dollar outlets, across North America. Additionally, the company is on track to leverage Family Dollar and Dollar Tree distribution center systems and combined merchandise. This will help bring the latest products into Dollar Tree stores without disruptions.

Robust View

Following the robust first-quarter fiscal 2022 performance, Dollar Tree raised its fiscal 2022 guidance. The company expects consolidated net sales of $27.76-$28.14 billion compared with the $27.22-$27.85 billion mentioned earlier. It anticipates enterprise comps growth in the mid-single digits for fiscal 2022, including a high-single-digit increase in the Dollar Tree segment and almost flat comps in the Family Dollar segment.

Management envisions earnings of $7.80-$8.20 per share compared with the prior mentioned $7.60-$8.00 per share. It expects selling square footage to increase 3.9%. The Dollar Tree segment is likely to deliver an improved operating margin for fiscal 2022, with the gross margin benefiting from its strategic initiatives as well as leverage on SG&A.

For second-quarter fiscal 2022, Dollar Tree expects consolidated net sales of $6.65-$6.78 billion, with enterprise same-store sales growth in the low to mid-single digits. It anticipates earnings of $1.45-$1.55 per share.

Bottom Line

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, will offset elevated freight costs, softness in the Family Dollar banner and higher SG&A expenses.

The Zacks Consensus Estimate for Dollar Tree's fiscal 2022 earnings is pegged at $8.15 per share, which has moved up by a penny in the past seven days. The consensus mark suggests growth of 40.5% from the prior year’s reported figure. Also, a long-term earnings growth rate of 15.5 drives optimism.

Other Stocks to Consider

We have highlighted three other top-ranked stocks in the Retail - Wholesale sector, namely Boot Barn (BOOT - Free Report) , Designer Brands (DBI - Free Report) and Chico’s (CHS - Free Report) .

Boot Barn, a lifestyle retailer of western and work-related footwear, apparel and accessories, currently sports a Zacks Rank #1 (Strong Buy). BOOT has an expected EPS growth rate of 20% for three-five years. Shares of BOOT have gained 15.9% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Boot Barn’s current-year sales and earnings per share (EPS) suggests growth of 17% and 4.4%, respectively, from the year-ago period’s reported figures. BOOT has a trailing four-quarter earnings surprise of 25.2%, on average.

Designer Brands, which designs, manufactures, and retails footwear and accessories in North America, flaunts a Zacks Rank of 1 at present. DBI has a trailing four-quarter earnings surprise of 102.5%, on average. The stock has declined 7% in the past year.

The Zacks Consensus Estimate for Designer Brands’ current-year sales and EPS suggests growth of 6.9% and 16.5%, respectively, from the year-ago period’s reported numbers.

Chico’s, an omnichannel specialty retailer, presently carries a Zacks Rank #2. CHS has a trailing four-quarter earnings surprise of 330.6%, on average. Shares of the company have declined 1.9% in the past year.

The Zacks Consensus Estimate for Chico’s current-year sales and EPS suggests growth of 16.5% and 15%, respectively, from the year-ago period’s reported numbers.