Dollar Tree, Inc. (DLTR - Free Report) seems to be on a roll. With a splendid comparable store sales (comps) performance backed by solid strategic initiatives, the company has been constantly adding new leaves to its growth story. The reflection of the same is quite evident from the stock’s impressive performance. Notably, the company has gained 32.2% in the past three months, thanks to its upbeat second-quarter fiscal 2017 results and an encouraging view. Moreover, this department store retailer surged 14.5% year to date, against the industry’s 1.2% drop.
While a challenging retail landscape and reduction in SNAP benefits could act as deterrents, this Zacks Rank #3 (Hold) company’s growth efforts are likely to keep it going. Nevertheless, let’s delve deeper into Dollar Tree’s growth drivers.
Superb Comps Record
Dollar Tree has been witnessing remarkable comps growth, backed by its competitive pricing and strategic store expansion plans, including remodeling and relocations. Incidentally, the company’s second-quarter fiscal 2017 marked 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, thus reflecting further growth potential.
Focus on Store Expansion Bodes Well
Dollar Tree 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.
Family Dollar’s Integration Boosts Results
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 more than 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 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.
Outlook Fuels Estimates
All these factors, along with contributions from the company’s online business Dollar Tree Direct, helped it post robust financial numbers in the second quarter. Evidently, both the top and bottom lines improved year over year and came ahead of the Zacks Consensus Estimate. Also, management raised its outlook for fiscal 2017, reflecting confidence in the second-half performance.
The company 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, the Zacks Consensus Estimate for the third quarter and fiscal 2017 has gone up by 4 cents and 21 cents to 89 cents and $4.66 respectively, in two months.
President Trump is suggesting on reducing food stamps program by $193 billion, which is approximately 25% of the budget for the program. Cut in SNAP benefit may hamper Dollar Tree performance as people with low income will have less money to spend and could restrict spending to low margin products. Thus, reduction in SNAP benefit could pose hurdles to the company.
Also, management stated that it expects store payroll expenses to remain pressurized on account of the elevating minimum wages. We believe that this could raise the SG&A costs and hurt the operating margin. Additionally, stiff competition from other industry players and the growing online dominance of Amazon.com Inc. (AMZN - Free Report) pose a threat to Dollar Tree.
However, we expect Dollar Tree’s growth endeavors to tide over the obstacles and help the company keep up its solid show on the bourses.
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