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Will Dollar Tree's Store Optimization Efforts Aid Growth?

Zacks Equity Research

Dollar Tree, Inc. DLTR is consistently benefiting from the restructuring and expansion initiatives. This is quite evident from steady store openings and enhancement of distribution centers. Additionally, the company is smoothly progressing with the integration of the Family Dollar brand, which is significantly contributing to its quarterly results.

A glance at this Zacks Rank #3 (Hold) stock’s price performance shows that it has gained 18.5% in the past six months against the industry’s 2.7% decline. Further, a VGM Score of A with an expected long-term earnings growth rate of 9.8% highlights the stock’s inherent potential.



Let’s Delve Deep

Dollar Tree plans to accelerate its store optimization program in fiscal 2019. In this regard, it is imperative to mention that management has launched H2 — the latest model for new and renovated Family Dollar stores internally. This model has boosted traffic, thus leading to average comparable store sales (comps) growth in excess of 10% over control stores. Further, the company plans to install adult beverages in roughly 1,000 stores, and expand freezers and coolers in roughly 400 outlets.

Additionally, Dollar Tree is undertaking significant store renovation initiatives for Family Dollar in a bid to attract more customers. During fourth-quarter fiscal 2018, it renovated 34 Family Dollar stores, completing nearly 522 renovations in the fiscal year. Markedly, this is above the company’s initial target of 450 Family Dollar renovations for fiscal 2018. Dollar Tree also re-bannered nearly 200 Family Dollar stores to Dollar Tree stores in the same period.

The re-bannered Family Dollar stores have been contributing to the company’s profitability by more than $55 million per year, which are likely to increase going ahead. As a result, management expects annual savings for the Dollar Tree banner to be above $60 million in indirect procurement and also higher than $70 million in initial merchandise expenses. Backed by the positive outcomes, the company now expects to renovate at least 1,000 Family Dollar stores in fiscal 2019. It also expects to re-banner about 200 Family Dollar stores to the Dollar Tree banner. Moreover, the company intends to close nearly 390 stores.

These store optimization measures are anticipated to help increase comps by up to 1.5%, after its implementation by the end of fiscal 2019. These actions place Dollar Tree on track to reach its 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 intends to open a distribution center in Rosenberg, Fort Bend County, TX, in fiscal 2019.

Meanwhile, Dollar Tree has been displaying remarkable comps growth. Its strategic store expansion plans including remodeling and relocations coupled with competitive pricing have been fueling comps. In fact, Dollar Tree stores marked the 44th straight quarter of comps growth. Notably, the newly renovated Family Dollar stores are delivering strong performance, which is also driving overall comps. For first-quarter and fiscal 2019, the company anticipates comps growth of low-single digits range.

Conclusion

We expect Dollar Tree’s robust store-optimization efforts to consistently drive comps and overall profitability. It is imperative to mention that the company reverted to positive sales surprise trend in fourth-quarter fiscal 2018, after reporting a miss in the preceding four quarters, and posted a second straight earnings beat. The positive surprise trend also supports the ongoing momentum in the stock, which in turn, bodes well for growth.

3 Better-Ranked Stocks in the Retail Space

Abercrombie & Fitch Co. ANF has outpaced the earnings estimates in each of the last four quarters by an average of 88.3%. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Stitch Fix, Inc. SFIX is also a Zacks Rank #1 stock, which has an impressive long-term earnings growth rate of 22.5%.

MarineMax, Inc. HZO delivered average positive earnings surprise of 53.4% in the trailing four quarters. The company has a Zacks Rank #2 (Buy).

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