Dollar Tree Inc. DLTR has been in the news lately after an activist investor, Starboard Value, which is its 1.7% stakeholder, decided to step back on its intentions to make changes to the company’s board. Dollar Tree acknowledged Starboard’s decision to withdraw its nominees for the board and welcomed its suggestions for the betterment of the company.
In January 2019, Dollar Tree was challenged by Starboard regarding its policies. Starboard’s letter to Dollar Tree suggested considering alternatives for Family Dollar, including a possible sale, while also raising prices for some of its products above the company’s Dollar-one price-point strategy. Additionally, Starboard demanded a change in the company’s board and proposed to nominate seven candidates to the board of directors in the upcoming board elections.
This action came after Starboard noticed that the Dollar Tree stock has been underperforming peers since it acquired Family Dollar in 2015. This was mainly because Family Dollar’s sales persistently remained soft.
However, on Apr 5, Starboard decided to withdraw nominations from the board after constructive talks with the Dollar Tree board, wherein the latter agreed upon considering a multiple price-point strategy for its stores. Further, Starboard stated that it is convinced with Dollar Tree’s strategies to bring a turnaround at the Family Dollar chain. Probably, Dollar Treee’s March announcement to close 390 Family Dollar stores in fiscal 2019 has brought confidence in the board’s policies.
Following Starboard’s announcement, Dollar Tree issued a statement, appreciating Starboard’s understanding. Further, Dollar Tree stated that it will continue to undertake efforts to revive the performance of Family Dollar and test new ways to deliver sustainable value for shareholders and customers.
Dollar Tree’s Store Optimization Plans
Dollar Tree plans to accelerate the store optimization program in fiscal 2019. In this regard, it is imperative to mention that management launched H2 — the latest model for new and renovated Family Dollar stores internally. This model boosted traffic, thus leading to average comparable store sales (comps) growth in excess of 10% over control stores. Further, Dollar Tree 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 in the years 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. Management also expects to introduce 350 Dollar Tree and 200 Family Dollar stores in fiscal 2019.
These store optimization measures are likely 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 the 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.
The optimism regarding the Dollar Tree’s initiatives is clearly reflected in its price performance. This Zacks Rank #3 (Hold) stock has gained 21.6% in the past six months, outperforming the industry’s 6.4% rally.
3 Better-Ranked Retail Stocks
Costco Wholesale Corp. COST has an impressive long-term earnings growth rate of 8.9%. 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.
Target Corporation TGT has a long term earnings growth rate of 6.3% and currently carries a Zacks Rank #2.
Nordstrom, Inc. JWN, also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 6%.
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