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Dollar Tree Hits 52-Week High: Growth Strategies on Track

Zacks Equity Research

Dollar Tree, Inc. DLTR is progressing well with its Dollar Tree Plus! Test. Banking on this, the company plans to add merchandise with higher price points to its stores. Further, its store-optimization efforts along with robust comps trend, which reflects strength in Dollar Tree and Family Dollar banners, bode well. Such well-chalked efforts enable the company to strengthen its portfolio and expand larger market share.

This is clearly reflected in the stock’s bullish run on the bourses. Shares of the company have scaled a 52-week high of $113.67 on Sep 20, before closing a tad lower at $111.07. Also, this Virginia-based company’s shares have rallied 29.7% in a year’s time compared with the industry’s 18.5% growth. Impressively, this Zacks Rank #3 (Hold) stock has outperformed the Retail-Wholesale sector’s decline of 1.1% and the S&P 500’s rise of 1.4%.

Furthermore, analysts have steadily become bullish on the stock. The Zacks Consensus Estimate of $5.03 for fiscal 2019 has moved north by 2 cents in the past 30 days.

Additionally, Dollar Tree boasts an impressive surprise history. The company delivered positive earnings surprise in three of the last four quarters, while sales beat estimates for the third straight quarter.

Growth Drivers

Dollar Tree is testing the addition of merchandise with higher price points to select stores to boost sales and margins through the Dollar Tree Plus! initiative. Currently, it is formulating tests to measure the impact of different price points, items and categories, store profitability as well as affinity of loyal customers for the Dollar Tree brand. As part of the tests, the company will leverage Family Dollar and Dollar Tree distribution center systems along with combined merchandise to roll out new products to Dollar Tree stores without operative disruptions. The company plans to offer merchandise at price points of $3, $4 and $5. These will be displayed in end caps branded as Dollar Tree Plus! to minimize confusion with the dollar value offerings. By the end of June, the company successfully rolled out these tests to nearly 115 stores.

This apart, the company has been enjoying sturdy comps performance for a while, which was witnessed during second-quarter fiscal 2019.Notably, enterprise comps improved 2.4% driven by constant-currency comps growth of 2.4% in the Dollar Tree and Family Dollar segments. Competitive pricing along with strategic store expansion plans, including remodeling and relocations, contributed to comps. This marked the 46th straight quarter of comps growth for the Dollar Tree segment. Further, comps at Family Dollar marked the third consecutive quarter of sequential rise. Going ahead, the company anticipates enterprise comps growth at low-single digits for the third quarter and fiscal 2019.

Further, the company is on track with restructuring and expansion initiatives that include store openings as well as improvement of distribution centers. In this regard, the company opened 150 stores, including 107 Dollar Tree and 43 Family Dollar stores in second-quarter fiscal 2019. Also, it expanded or relocated 19 outlets (including 17 Dollar Tree and two Family Dollar units) and shuttered 296 Family Dollar as well as nine Dollar Tree stores. The company also added freezers and coolers in 210 Dollar Tree stores in the reported quarter, bringing the total Dollar Tree store count, with freezers and coolers, to 5,970.

These initiatives put the company on track to reach long-term target of operating 26,000 stores, with more than 10,000 Dollar Tree and 15,000 Family Dollar outlets across North America. Additionally, the company is on track to leverage Family Dollar and Dollar Tree distribution center systems as well as combined merchandise. This will enable the company to roll out latest products into Dollar Tree stores.

Additionally, the company is focused on the integration of Family Dollar that was acquired in July 2015. The company is undertaking significant store renovation initiatives for Family Dollar to attract more customers. As part of its store optimization program for the Family Dollar brand, the company is rolling out H2 — the latest model for the new and renovated Family Dollar stores — internally. Moreover, it completed the renovation of 542 Family Dollar to the H2 format during the fiscal second quarter. These renovations are likely to boost traffic at stores and driveaverage comps.

Driven by the robust momentum in Family Dollar stores due to these initiatives, the company raised its targeted Family Dollar H2 renovations for fiscal 2019 by 150 stores. It now expects to undertake 1,150 Family Dollar H2 renovations in fiscal 2019 compared with 1,000 mentioned earlier. The majority of H2 renovations will be carried out in the fiscal third quarter.

Bottom Line

Although these above-mentioned initiatives bode well for the company, dismal margin trend due to high SG&A expenses and tariffs are headwinds. Nevertheless, we expect the company’s positive prospects to boost profitability. In fact, management raised earnings view for fiscal 2019. It now envisions earnings in the range of $4.90-$5.11 per share compared with $4.77-$5.07 mentioned earlier.

Looking For Solid Retail Stocks, Check These

Burlington Stores BURL has a long-term earnings growth of 15.9% and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dollar General DG has a long-term earnings growth of 10.2% and holds a Zacks Rank #2.

Target Corporation TGT has a long-term earnings growth of 7.1% and a Zacks Rank #2.

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