|
|
|
|
||
Dollar Tree Stock Is Rising. Why Wall Street Sees a Comeback for the Discount Retailer.Dollar Tree Stock Is Rising. Why Wall Street Sees a Comeback for the Discount Retailer.Rivas, Teresa.Barron's (Online); New York Dollar Tree shares are rising Thursday, as the market continues to digest its fourth-quarter earnings results. The more you dig into the report, the more there is to like. On the surface, Dollar Tree's (ticker: DLTR) quarter was far from a blowout: Its top-line came in a bit light, comparable sales disappointed, gross margins declined, its first-quarter forecast was below consensus, the Family Dollar unit continued to lag, and it didn't provide nearly as much detail as many would have liked about its $1.25 price increases . That doesn't sound like a result that would help the shares, and indeed they did fall initially following the report. Yet they're rebounding quickly, and Dollar Tree is up about 6% to $148.25 in early Thursday afternoon trading. So what's behind the move? That probably has something to do with investor expectations going into the report. Dollar Tree has long lagged rival Dollar General (DG), hurt in large part by its troubled acquisition of Family Dollar, dating to 2015. During the pandemic it was hurt further given that it gets a larger chunk of its business from discretionary purchases like holiday and party décor than the more essentials-focused Dollar General. Yet as Barron's argued back in mid-2020, there was evidence that Dollar Tree, however fitfully, was managing to turn things around . The shares have increased more than 52% since that article's publication. For those who believe in Dollar Tree's comeback, the quarter did show promise, and was "enough to keep the dream alive," as Wells Fargo's Edward Kelly characterized it, reiterating an Overweight rating and $175 price target. Moreover, one of the things Dollar Tree did say about its $1.25 push was that at least half of its remerchandising—which it expects to offset declines related to the price increases—would be finished by summer. It's also rolling out its Dollar Tree Plus! Assortment of $3 and $5 items to an additional 1,500 stores this year, with a goal of 5,000 stores by the end of 2024. That could all help margins, and many see the company's full-year guidance as conservative, and expect earnings per share estimates to rise throughout the year. Then there's the ongoing activist interest in the shares, as Mantle Ridge is pushing for seats on the company's board and for the company to hire a former Dollar General chairman. "Dollar Tree noted it is in weekly talks with Mantle Ridge and has halted buybacks for 2022…suggesting a much more collaborative tone since its December press release," writes BMO Capital Markets analyst Kelly Bania. She has an Outperform rating and $170 price target on the shares, noting that it "feels like Part II of our favorable risk/reward thesis is playing out." Then there's the state of the low-income consumer. While inflation and comparisons to a stimulus-boosted 2021 are headwinds for retailers catering to this group, there's also reason for optimism that they can keep spending amid a tight labor market that's seeing wages tick higher . Walmart's (WMT) recent report sounded a positive note about the ongoing strength of the consumer, and as dour as Burlington Stores' (BURL) fourth-quarter was, the company noted that unpredictably has benefitted discounters in the past, as shoppers seek out value. Indeed, data from Placer.ai show that visits to discounters as a whole on a two-year basis—i.e. comparing before and after the pandemic—"show that discount superstores now hold a significantly stronger position than they did pre-Covid." In December alone, traffic to Family Dollar climbed more than 20% while Dollar Tree visits were up nearly 14% compared to December 2019. Yet even if this sunny scenario doesn't play out and consumers pull back, Dollar Tree could still be the relative winner. For example, Barron's has argued that as growth in the home improvement sector becomes harder to come by, Lowe's (LOW) could pull ahead, as its successful turnaround provides company-specific catalysts. While it's not an apples-to-apples comparison by any means, Dollar Tree could benefit from a similar dynamic. If it continues to execute well, its self-help initiatives could potentially propel profits ahead of peers if the overall environment gets tougher. Tesley Advisory Group's Joseph Feldman has an Outperform rating and $180 price target on Dollar Tree. He believes "transformative initiatives, combined with ongoing strategies, including new store openings, joint sourcing, and joint distribution centers, as well as in-store changes, such as new cooler doors and snack zones, should drive solid multi-year improvement in productivity and profitability." No wonder some investors smell a bargain. |
return to message board, top of board |