Dollar Tree (DLTR - Free Report) is among the few retailers that have shown resilience in a tough industry backdrop amid changing consumer preferences. A negative surprise trend in recent quarters due to increased costs, stemming from the integration of Family Dollar, and other industry-wide cost increases was a headwind for the company’s shares that witnessed significant decline. Notably, the stock has declined 2.9% in the past three months against the industry’s growth of 11.5%.
However, we believe that integration costs are near-term headwind while the Family Dollar integration should position the company for growth in the long run. Additionally, initiatives to improve store productivity, alongside expansion of store base, reveal the company’s growth potential. Further, the company is likely to witness improved traffic trends, driven by the focus on consumables and discretionary categories, and the everyday low-price model that is anticipated to bolster sales.
Apart from these, this Zacks Rank #3 (Hold) company’s impressive long-term earnings growth rate of 14.2% and a Value Score of A are witnesses to the stock’s strong fundamentals. Let’s delve deeper and find out factors that can turnaround Dollar Tree’s stock performance.
Factors Likely to Aid the Stock’s Growth
Comps Growth Reveal Potential
Though the company has witnessed dismal earnings and sales surprise trend, its top and bottom lines continue to improve year over year. Additionally, it has been displaying remarkable comps growth, mainly due to competitive pricing and store expansion plans — including remodeling and relocations. The company continued the positive trend in second-quarter fiscal 2018, with consolidated comps growth of 1.8%. Moreover, anticipated comps growth of low-single-digit range for both the third quarter and fiscal 2018 remain encouraging.
Expansion of Store Base
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 leverages an extensive network of stores to penetrate target markets. This, in turn, enables it to generate healthy sales and gain market share. Additionally, it is focused on the expansion of distribution centers to deliver enhanced customer experience.
As part of these efforts, the company opened the 15,000th store and 23rd distribution center in Warrensburg, MO, in July 2018. The Warrensburg facility — a $110-million investment — is expected to serve the company’s Midwestern U.S. stores in 11 states. With the latest store opening, the company is on track to reach its target of operating 26,000 stores, including more than 10,000 Dollar Tree and over 15,000 Family Dollar outlets, across North America in the long term. Further, management remains on track to open its 24th distribution center in Morrow County, OH, in the summer of 2019.
Family Dollar Integration on Track
Dollar Tree is progressing well with the integration of Family Dollar that was acquired in July 2015. Notably, sales from the Family Dollar banner represented nearly 50% of the company’s consolidated sales in the second quarter of fiscal 2018. Further, the company is undertaking significant store renovation initiatives for Family Dollar to attract more customers. During the fiscal second quarter, the company completed renovations of 109 Family Dollar stores and re-bannered 17 Family Dollar stores to Dollar Tree stores for a total of 285 projects. Backed by encouraging results of renovations, the company plans to extend the target of 450 Family Dollar store renovations for fiscal 2018 to 500. Additionally, it expects to set higher renovations target for fiscal 2019.
Further, in the last month, the company announced plans to shutter Family Dollar’s headquarters in Matthews, NC, by next fall as part of the integration of Family Dollar. Simultaneously, it will consolidate Family Dollar’s store support centers in Matthews and Chesapeake, VA, into the recently completed 12-story 510,000-sq. ft office tower in Chesapeake. However, Family Dollar's distribution center in Matthews will remain open, following the consolidation.
Apart from aforementioned factors, the company is poised to gain from its focus on the consumables and discretionary categories and everyday low-price model. Notably, Family Dollar’s consumables business, which forms nearly a third of its product base, reported positive comps for the seventh consecutive quarter in second-quarter fiscal 2018. Moreover, sales performance at Dollar Tree banner was balanced between consumables and discretionary categories.
Furthermore, increased set-up of cooler facilities to boost sales is also likely to drive trips and basket size. Moreover, the company’s Smart Coupons are gaining traction and are anticipated to help increase conversion rate in all probability.
What’s Holding Us Back?
Despite a well-chalked plan for the future, we cannot ignore near-term headwinds that are plaguing the company. Its negative earnings and sales surprise trend and a cautious outlook, along with strained margins, keep us on the sidelines.
Notably, the company delivered negative top- and bottom-line surprise in the last three quarters. Further, it has been witnessing soft margins for the past two quarters due to higher costs — including domestic freight, shrink and distribution expenses. The company expects pressures from increased store payroll, higher wages and escalating domestic freight costs to persist, and hurt margins throughout fiscal 2018.
Additionally, the company’s results are likely to be hurt by the imposition of tariffs on goods imported from China. It recently discovered an anti-dumping duty, assessed by the U.S. Department of Commerce, on certain products from China. In relation to this anti-dumping duty assessment, the company expects to incur about 4 cents per share of expenses in the fourth quarter of fiscal 2018. Consequently, it has adjusted fiscal 2018 earnings guidance to include impacts of this duty assessment.
After a detailed study of the company’s growth drivers and headwinds, we would suggest to hold the stock for the long term, given lucrative opportunities in the discount space along with its stellar future plans. However, we should keep a close watch on Dollar Tree’s near-term results and how the aforementioned headwinds impact its performance.
Looking for Some Lucrative Picks? Look at These
Some better-ranked stocks in the same industry are Dollar General (DG - Free Report) , Ross Stores (ROST - Free Report) and Target Corp. (TGT - Free Report) , each sporting a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Dollar General has gained 28.7% in the past year. The company has long-term earnings growth rate of 13.6%.
Ross Stores has long-term EPS growth rate of 10%. Further, the stock has increased 47.6% in the past year.
Target grew nearly 47.3% in a year. Moreover, the company has long-term EPS growth rate of 6.8%.
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