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Can Store Initiatives Aid Dollar Tree (DLTR) Amid Cost Hike?

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Dollar Tree (DLTR - Free Report) has been benefitting from store openings, renovations, re-banners and closings. Also, 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, bode well.

The company has been aggressively expanding its $3, $4 and $5 frozen and refrigerated products across the Dollar Tree store base. In the fiscal second quarter, the company’s Dollar Tree Plus assortments were available in more than 3,600 locations and the $3, $4 and $5 frozen and refrigerated assortments were available in 5,600 stores.  DLTR plans to add this multiple-price-point product in other 1,800 or more stores in fiscal 2023. It expects to have at least 5,000 Dollar Tree Plus! stores by the end of 2024.

Dollar Tree’s restructuring and expansion initiatives, as evident from steady store openings and improvement of distribution centers, are likely to drive revenues. The company is on track to open 600-650 stores this year, with two-thirds of stores to be opened in the back half of the year.

It is also on track to complete at least 1,000 Family Dollar renovations by the end of this year. 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 any disruptions.

These factors led to year-over-year sales growth of 8.2% in second-quarter fiscal 2023. Enterprise same-store sales (comps) improved 6.9% year over year, beating our estimate of 4.8% growth. For the Dollar Tree banner, comps were up 7.8%, whereas the same for the Family Dollar banner improved 5.8%. Our model predicted comps growth of 4.9% for the Dollar Tree banner and 4.8% for Family Dollar.

In the quarter, traffic grew more than 3% at Family Dollar and 10% at Dollar Tree. This marked the fourth consecutive quarter of growth at Family Dollar and the second successive quarter of growth for Dollar Tree.

Consequently, management raised its fiscal 2023 top-line view. For fiscal 2023, Dollar Tree expects consolidated net sales of $30.6-$30.9 billion, up from the prior mentioned $30-$30.5 billion and our estimate of $30.1 billion. The company anticipates mid-single-digit comps growth compared with the earlier mentioned low to mid-single-digit growth and our estimate of 4.4% growth. Comps are likely to grow in the mid-single digits in the Dollar Tree and Family Dollar segments.

For third-quarter fiscal 2023, the company expects consolidated net sales of $7.3-$7.5 billion based on mid-single-digit comps growth for the enterprise. We estimate net sales of $7.3 million and comps growth of 3.7%. Comp sales are also expected to improve in the mid-single digits at Dollar Tree and Family Dollar.

Despite these upsides, the company has been witnessing inflationary costs, including elevated payroll, increased repairs and maintenance expenses and store facility costs, and wage investments in distribution center payroll. Also, a challenging macro environment is anticipated to continue hurting its sales mix in both segments.

Management expects margin pressure to persist through the back half of the year. For fiscal 2023, management expects earnings per share (EPS) of $5.78-$6.08 (including a 12-cent contribution from the 53rd week and a 12-cent charge for the legal reserve) compared with the prior mentioned $5.73-$6.13 for fiscal 2023. For third-quarter fiscal 2023, EPS is estimated to be 94 cents to $1.04 compared with our estimate of $1.18.


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As a result, shares of DLTR have lost 27.1% in the past three months compared with the industry’s decline of 1.1%.

Wrapping Up

We believe that a solid top line, led by Dollar Tree’s several store initiatives and expansion of its $3 and $5 plus assortment, will offset rising costs. The P/CF ratio for Dollar Tree is just 9.80, a level that is far lower than the industry average of 14.70. Clearly, this Zacks Rank #3 (Hold) company is a solid choice on the value front from multiple angles. Topping it, a Value Score of B reflects its inherent strength.

Key Picks

Some better-ranked stocks are BJ's Restaurants (BJRI - Free Report) , Urban Outfitters (URBN - Free Report) and Walmart (WMT - Free Report) .

BJ's Restaurants, which operates a chain of high-end casual dining restaurants in the United States, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for BJRI’s 2023 sales and EPS indicates 5.6% and 405.9% growth, respectively, from the year-ago period’s reported levels. It has a trailing four-quarter earnings surprise of 121.2%, on average.

Urban Outfitters, which engages in retail and wholesale of general consumer products, currently flaunts a Zacks Rank #1. The expected EPS growth rate for three to five years is 18%.

The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year earnings suggests growth of 57.1% from the year-ago reported number. URBN has a trailing four-quarter earnings surprise of 12.2%, on average.

Walmart, which operates a chain of hypermarkets, discount department stores and grocery stores, currently carries a Zacks Rank #2 (Buy). The expected EPS growth rate for three to five years is 5.5%.

The Zacks Consensus Estimate for Walmart’s current financial-year sales implies an improvement of 4.2% from the year-ago period’s actual. WMT has a trailing four-quarter earnings surprise of 12%, on average.

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