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What's Behind Dollar Tree's (DLTR) Recent Recovery? Find Out

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Dollar Tree Inc. (DLTR - Free Report) seems to be gaining traction since the past one month, after the decline witnessed following the dismal earnings report in May and soft fiscal 2017 view. Notably, the stock recovered to decline only 5.7% in the last one month compared with the 10.8% fall recorded in the last three months.

Further, the Chesapeake, VA-based discount store retailer has outperformed the Zacks categorized Retail – Discount Stores industry’s fall of 9.9% in the last one month. Though Dollar Tree is yet to take flight, let’s take a close look at some factors that have aided recovery.



Robust Comps Performance

Dollar Tree has displayed remarkable comparable-store sales (comps) growth driven by its competitive pricing and strategic store expansion plans, including remodeling and relocations. The company’s positive comps trend continued in first-quarter fiscal 2017, which marked its 37th straight quarter of comps growth. The first-quarter comps growth was backed by improved transaction count and average ticket. Moreover, the company anticipates comps growth in the range of slightly positive to low-single digit increase in the second quarter and fiscal 2017.

Strategic Growth Initiatives

Further, we believe the company is on track with its long-term growth initiatives, which include store expansion strategies, enhancement of store productivity, creating new store formats, tapping of new markets and incorporating innovative sales channels to serve patrons better. Further, the company continues to implement strategies such as increasing consumables mix, rolling out freezers/coolers at stores along with multi-price point expansion, aimed at boosting top-line performance. Additionally, it is focusing on imported goods, supply chain efficiency and aggressive cost cuts to improve operating margin.

Store Expansion Strategy

Regarding stores, the company leverages an extensive network of stores to effectively penetrate targeted markets, enabling it to generate healthy sales and gain market share. During first-quarter fiscal 2017, the company opened 164 new stores and expanded or relocated 51 stores. With this, the company remains on track to operate over 10,000 Dollar Tree and over 15,000 Family Dollar outlets across the U.S.

Family Dollar Integration

The company is also well on track with Family Dollar’s integration, which it had acquired in Jul 2015. The company is set to undertake store renovation initiatives for Family Dollar in the second quarter, which is likely to attract more customers. While the increased costs and cannibalization during the integration and re-banner process are expected to weigh on the company’s results for some time, it anticipates generating annual run rate synergies worth at least $300 million by the end of the third year of this acquisition.

In fact, on completion of the integration, Dollar Tree is on track to become a mega U.S. discount retailer that can counter competition single handedly from retail bellwethers in the dollar-discount store segment. Further, the company will be well poised to reach out to more value-seeking consumers through a network spanning vast geographies. It will not only offer broader and multiple assortments at more compelling prices, but also will be better positioned to negotiate with suppliers which will enhance purchasing power.

Deterrents

Dollar Tree’s earnings missed our estimate in the last reported first-quarter fiscal 2017, after posting back-to-back surprises in the last two. Though sales improved year over year, it was somewhat impacted by delay in tax refunds and cycling of reduced SNAP benefits from last year. Moreover, management cut  fiscal 2017 earnings view.

Notably, reduction in SNAP benefits has been a concern for Dollar Tree for a while now, and with chances of President Trump’s proposed food stamp cut getting passed, the situation could get worse. Trump has suggested reducing food stamps program by $193 billion, which is approximately 25% of the budget for the program. Cut in SNAP benefits is likely to hamper Dollar Tree’s performance, as people with low income will have less money to spend and could restrict their spending to low margin products.

Bottom Line

Though the company’s near-term performance is likely to be troubled, its long-term initiatives and the Family Dollar integration provide a positive outlook for the future. With these initiatives on the cards, we believe the company can surely overcome these near term hurdles.

Aptly, Dollar Tree currently carries a Zacks Rank #3 (Hold). Investors looking for growth may, however, consider placing bets on Target Corp. (TGT - Free Report) with a Zacks Rank #1 (Strong Buy), as well as Dollar General Corp. (DG - Free Report) and Ross Stores Inc. (ROST - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Target has a long-term EPS growth rate of 5.4%. Moreover, the stock has seen positive estimate revisions in the last 60 days and has to its credit an average positive surprise of 16.5% in the trailing four quarters.

Dollar General, with long-term EPS growth rate of 10.6%, has grown 2.1% in the last three months.

Ross Stores, with long-term EPS growth rate of 10.5%, has witnessed positive estimate revisions in the last 60 days. Moreover, the company has delivered an average positive surprise of 5.8% in the trailing four quarters.

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