Dollar Tree Up More Than 15% in 3 Months: What Lies Ahead?

Zacks Equity Research

Shares of Dollar Tree, Inc. DLTR have rallied 15.7% in the past three months, outperforming the industry’s growth of 0.3%. Moreover, this Zacks Rank #3 (Hold) company’s shares have jumped 25.8% in a month compared with the industry’s growth of 7.7%.

The stock’s bullish run on the bourses can be attributable to its positive earnings surprise streak, which was retained in the first quarter of fiscal 2020. Also, its top line surpassed the Zacks Consensus Estimate and rose year over year, driven by the continuity of its store operations as well as an extraordinary spike in demand for certain products witnessed in March, stemming from the COVID-19 crisis. Apart from these, SG&A expense leverage contributed to quarterly results.

That said, let’s delve deeper into the factors driving the stock.

Factors Narrating Dollar Tree’s Growth Story

Dollar Tree has been witnessing a solid performance in enterprise same-store sales (comps) for the past few quarters. First-quarter comps gained from an improvement in Family Dollar stores as increased number of consumers were piling up essentials in March due to the spread of coronavirus. Moreover, the Family Dollar stores are likely to continue witnessing improvements in discretionary categories in the fiscal second quarter. The company is also seeing a rebound in items like crafts, graduation, stationery, Mother’s Day seasonal and balloons. Owing to the spike in traffic, the company recently hired 25,000 employees to serve its stores and distribution centers.

Further, the company has undertaken various preventive measures to provide uninterrupted service to customers in such trying times. It is actively working with vendor partners to support and streamline shipments of essentials. Additionally, it has installed more than 16,000 plexiglass shields at store checkouts and is encouraging contactless payment options through tap-to-pay with Visa, MasterCard, Apple Pay and Google Pay.

Apart from these, management boasts a strong balance sheet, with ample liquidity, and a flexible business model to help steer through the uncertain environment. As of Mar 30, 2020, it had $1.9 billion of cash and investments, including $750 million drawn from its revolving credit facility. It currently has $1.25 billion on its revolving line of credit. Furthermore, the company suspended the share repurchase activity, with the current available authorization of $800 million for the near term.

Hurdles on The Way

The company’s Dollar Tree segment witnessed a decline in traffic with the government’s rising restrictions in response to COVID-19. Moreover, soft Easter holiday sales along with lower sales of seasonal and discretionary products weighed on the segment’s comps.

Further, margins in the fiscal first quarter were hurt by higher payroll costs stemming from the ongoing outbreak. Adverse merchandise mix, incremental tariffs of $23 million and Easter merchandise-related markdowns hurt the gross margin. Notably, this was the ninth straight quarter of soft gross and operating-margin performance for the company.

Given the expectations of continued volatility and uncertainty as the COVID-19 situation evolves, Dollar Tree refrained from updating its outlook for fiscal 2020.

Wrapping Up

Although uncertain COVID-19 impacts remain a concern, we see that the company is strong with continued business momentum and a solid cash position. This should help Dollar Tree emerge strongly from the crisis. In fact, the stock’s VGM Score of A and long-term earnings growth rate of 10.8% reflect its inherent strength. Also, the stock is hovering close to its 52-week high of $119.71.

Key Picks

Big Lots BIG has a long-term earnings growth rate of 12% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Kroger KR has a long-term earnings growth rate of 4.9% and a Zacks Rank #2.

Dollar General Corporation DG has a long-term earnings growth rate of 12.2% and a Zacks Rank #2.

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