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Dollar Tree and Best Buy have been highlighted as Zacks Bull and Bear of the Day

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For Immediate Release

Chicago, IL – June 23, 2022 – Zacks Equity Research shares Dollar Tree, Inc. (DLTR - Free Report)  as the Bull of the Best Buy Co., Inc. (BBY - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on KB Home (KBH - Free Report) .

Here is a synopsis of all three stocks:

Bull of the Day:

Consumer sentiment is tumbling as people stare at sky-high gas prices and grocery bills. Inflation remains at 40-year highs and many consumers are already cutting back on major expenses and looking for savings anywhere they can.

Discount retail standout Dollar Tree, Inc. has grown during an array of economic environments and it's poised to thrive as more Americans tighten their purse strings. Dollar Tree posted solid first quarter growth in late May and upped its guidance in the face of all of the broader economic headwinds.

DLTR Basics

Dollar Tree is a discount retailer that operates over 15,500 stores across much of the U.S. and Canada, including its namesake locations, Family Dollar, and newer combo stores. The retailer's dollar-focused name until recently showed up exactly in its price points, with everything at Dollar Tree stores priced at $1.

Dollar Tree announced last November that it was raising its prices for the first time in company history. Dollar Tree slowly began to implement its new $1.25 price points. DLTR said in March that it completed its new price-point rollout at all U.S. Dollar Tree stores a full two months ahead of schedule.

Many on Wall Street initially speculated that Dollar Tree's new higher prices were made in response to inflation. However, the company's executive team said the move was made after roughly 35 years at the $1 price point in order to expand its offerings and sell a far wider range of merchandise to customers.

Meanwhile, its Family Dollar stores sell many items at the $1 price point, along with a broader array of offerings under $10. Dollar Tree also said in March that it saw strong performances in other newer areas, including the expansion of its "$3 and $5 Plus assortment in Dollar Tree stores, as well as our Combo Stores and H2 Renovations at Family Dollar."

Dollar Tree operates smaller format stores compared to the likes of Target and Walmart and it has been aggressively expanding its brick-and-mortar footprint. DLTR opened 112 new stores during its first quarter ended on April 30, while also completing numerous renovations and rolling out its multi-price "Plus" offering into an additional 790 Dollar Tree stores.

Recent Growth and Outlook

Dollar Tree has grown its revenue rather steadily for decades and its sales soared after it purchased Family Dollar in 2015. DLTR's sales climbed 3% last year and 8% in FY20, while its adjusted earnings popped 2.7% in fiscal 2021. Most recently, DLTR topped our Q1 FY22 EPS and sales estimates on May 26 and raised its guidance.

The company's new higher prices appear to be showing up on both the bottom and top lines, with Dollar Tree's adjusted Q1 EPS up 48% YoY. Meanwhile, its revenue climbed 6.5% to $6.9 billion, with same-store Dollar Tree sales up +11.2%.

Dollar Tree has now topped our quarterly EPS estimates by an average of 13% in the trailing four periods, and its FY22 consensus estimate is up 3% since its release, with FY23 5.5% higher. These positive bottom-line revisions came in the face of slowing overall consumer sentiment, rising inflation, and lower guidance from many companies across an array of industries.

Zacks estimates call for Dollar Tree's revenue to climb 6.7% in 2022 and another 6% in 2023 to reach $29.76 billion. At the bottom end, its adjusted earnings are projected to surge 41% this year and 14.4% next year.

Bottom Line

Dollar Tree shares have soared 970% in the past 15 years to crush its discount retail industry's 500% and blow away the broader retail-wholesale market's 207%.

The company has also been a standout since last fall, with DLTR up 53% in the last 12 months vs. its sector's 34% downturn. This run includes an 11% jump in 2022, which is rather impressive with the market down over 20%.

Investors should note that DLTR stock tumbled after Target's brutal guidance in mid-May, only to skyrocket back after its own quarterly results and guidance showcased strength amid changing shopping patterns. Dollar Tree closed regular trading Wednesday at $155 per share or roughly 12% below its records.

In terms of valuation, Dollar Tree trades at a 16% discount to its industry at 18.2X forward 12-month earnings and 23% below its own highs over the past 10 years. Dollar Tree also boasts a solid balance sheet, and it's committed to long-term expansion within a segment of the retail sector that's never going out of style.

Dollar Tree's strong earnings revisions activity helps it land a Zacks Rank #1 (Strong Buy) right now. And investors might want to consider the firm for its ability to expand during an inflationary environment as people look to save money wherever they can. Plus, its new $1.25 price point is set to boost its earnings and revenue growth over the long haul.

Bear of the Day:

Best Buy Co., Inc. faces a quickly changing consumer spending environment and rising inflation. The broad-based economic tailwinds that helped Best Buy post back-to-back big years of impressive growth are coming to an end, as the housing market cools and people start spending less on big-ticket items. 

Pandemic-Style Shopping Slows

Best Buy sells smartphones, TVs, connected appliances, and nearly every other consumer electronics device under the sun. Best Buy has grown even though Target, Walmart and other giants sell similar products. The company, like everyone else, has spent years improving its digital commerce offerings.

Best Buy's core business and its e-commerce efforts helped it thrive when people began to work from home and spent big on items to fill new homes. Best Buy also benefited from stimulus checks and pandemic rebound shopping sprees. And its long-term outlook remains intact. But consumers are shifting their spending to services and other areas of retail, while also slowing big purchases amid soaring inflation and recession fears.

Best Buy's sales climbed over 8% during 2020 (its FY21), with FY22 revenue up 9.5%. But the firm's fourth quarter sales slipped over 3% and its first quarter FY23 revenue dipped 9% on the back changing spending habits and tough-to-compete against periods.

The electronics retailer fell short of Zacks Q1 estimates on May 24. Best Buy management lowered its guidance, with its FY23 and FY24 consensus EPS estimates down 3.3% and 3.9%, respectively.

Zacks estimates call for BBY's revenue to slip over 5% this year, with its adjusted earnings projected to fall 13%. "Macro conditions worsened since we provided our guidance in early March... Those trends have continued into Q2 and, as a result, we are revising our sales and profitability expectations for the year," CEO Corie Barry said in prepared remarks.

Bottom Line

Best Buy's downward earnings revisions help it land a Zacks Rank #5 (Strong Sell) right now. The company is also part of the Consumer Electronics industry which is in the bottom 3% of over 250 Zacks industries right now. BBY shares have tumbled 31% in 2022 to lag its industry and the broader retail market.

Best Buy stock is still up 26% in the past five years to roughly match the Zacks Retail-Wholesale Market. And the fall has made its dividend yield stronger. Still, it might be best to stay away from Best Buy stock with consumer sentiment at historic lows and shoppers focused on other areas of retail, as well as services.

Additional content:

Markets Marginally Lower After Powell Talk; KBH Beats on Q2

Market indices yesterday slid into the close, but practically hugged the zero-balance for most of the last half-hour of trading. In any case, we finished much more admirably than we began: the Dow was -48 points, -0.16% on the day, the Nasdaq was -0.15% and the S&P 500 -0.13%. The small-cap Russell 2000 took up the rear, but again, only marginally: -0.22%.

Is it good news? Fed Chair Jay Powell found himself accentuating the positives in the U.S. economy this morning before the Senate Banking Committee, in which he told the panel the U.S. banking industry is "very strong," that the Fed understands the full extent of inflation challenges, and that it's not too late to bring inflation under control. These all proved to be a decent salve for market participants, at least for a short while.

Powell did not suggest the size of the next rate hike, but did tell senators to expect more raises in the near term. (The next meeting of the Federal Open Market Committee [FOMC] is scheduled for July 26th and 27th.) The Fed Chair continued to speak about optimum inflation being 2%, and that the FOMC was committed to bringing inflation down to that level. Thus far, no moving the goalposts on "optimum inflation."

Economic data picks up next week and the week after that, and from there we'll dovetail into the heart of Q2 earnings season. This ought to give plenty of grist for the mill to the Fed to make informed choices. The next CPI report, for instance — that of the +8.6% "inflation metric heard 'round the world" last time around — comes three weeks from yesterday.

After yesterday's closing bell, we did see Q2 earnings for KB Home, the Zacks Rank #4 (Sell)-rated homebuilder ahead of the numbers. Earnings and sales surprised to the upside in the quarter: $2.32 per share came in well ahead of the $1.97 in the Zacks consensus, on revenues of $1.72 billion compared to the $1.61 billion expected.

The median price of a newly built home in the quarter by KB Home grew +21% to $494,300, which is a reflection of the robust strength in Housing (at least before the Fed began raising interest rates more than a quarter-percent). The company does see its sales rate moderating going forward, but total sales expectations are higher for next quarter.

Shares were up +1.9% on the news in late trading. KB Home has only missed earnings estimates twice in the past five years (one of those times was the previous quarter), but its stock price is still nearly -19% in the past month alone; -39% year to date.

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