A surge of 11% in 13 days! Yes, that’s how the stock of Dollar Tree Inc. (DLTR - Free Report) has impressed. Ever since this discount store retailer released second-quarter fiscal 2017 results, it has been scaling up the charts. In fact, Dollar Tree has been in the green territory for a while now, as evident from the last three months performance. The company has gained 9.3%, against the industry’s 4.1% decline.
So, let’s see what’s been driving this Zacks Rank #3 (Hold) company, and if the growth drivers can help the company maintain its momentum amid a tough retail space.
Solid Q2 Leads to a Raised View
Dollar Tree posted robust financial numbers in second-quarter fiscal 2017, wherein both the top and bottom lines improved year over year and came ahead of the Zacks Consensus Estimate. In fact, the bottom line also surpassed the higher end of the company’s predicted range. Results were driven by continued strength in comps, along with margin expansion that was aided by reduced merchandise and freight expenses, and lower markdowns. Apart from strong performance by Dollar Tree’s stores, results also gained from the growth of the company’s online business, Dollar Tree Direct.
Further, the company remains confident of its overall second-half performance. Thus, management now forecasts net sales for fiscal 2017 (which will contain an additional week) in the band of $22.07-$22.28 billion, compared with the old projection of $21.95-$22.25 billion. Earnings per share is expected in the range of $4.44-$4.60, compared with the previous forecast of $4.17-$4.43. Well, estimates for the third quarter and fiscal 2017 have gone up by 4 cents and 21 cents to 89 cents and $4.66 respectively, following the splendid outcome.
Sturdy Comps — a Major Driving Factor
Dollar Tree witnessed remarkable comparable-store sales (comps) growth, backed by its competitive pricing and strategic store expansion plans, including remodeling and relocations. The company continued with the positive trend in second-quarter fiscal 2017 that marked Dollar Tree’s 38th straight quarter of comps growth. The second-quarter comps growth was backed by improved transaction count, as well as average ticket. Moreover, the company anticipates comps growth in a low single-digit range for the third quarter and fiscal 2017.
Integration of Family Dollar & Strategic Plans on Track
The mega-merger of Dollar Tree and Family Dollar has been benefiting the former ever since the deal was concluded in July 2015. Notably, sales from the Family Dollar banner represented over 50% of the company’s consolidated sales in the second quarter. Further, Dollar Tree is undertaking significant store renovation initiatives for Family Dollar 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 expects to generate annual run-rate synergies worth $300 million by the end of the third year of this buyout.
Apart from this, we believe that the company is progressing well with its 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. Also, we remain confident that the company will continue to implement strategies such as increasing consumables mix, rolling out freezers/coolers at stores along with multi-price point expansion to boost top-line performance.
Can These Hurdles be Offset?
Management stated that it expects store payroll expenses to remain pressurised on account of the elevating minimum wages. We believe that this could raise the SG&A costs and hurt the operating margin. Also, stiff competition from other industry players and the growing online presence thanks to Amazon.com Inc.’s (AMZN - Free Report) rising dominance remains a threat for Dollar Tree.
Nevertheless, like most retailers Dollar Tree is also trying all means to stay afloat amid a challenging retail landscape. So, for now we suggest holding on to this Chesapeake, VA-based company and see if its considerable endeavours can help it sustain its bull run.
Can’t Get Over Retail? Check These Trending Picks
Burlington Stores Inc. (BURL - Free Report) has an impressive earnings surprise history and long-term earnings per share growth rate of 16.2%. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Big Lots Inc. (BIG - Free Report) , with a Zacks Rank #2 has a long-term growth rate of 13.5%. Also, the company has delivered positive earnings surprise consistently in all four quarters.
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