We have initiated coverage on Dollar Tree Inc. (DLTR) with a Neutral recommendation and a target price of $57 per share. Moreover, our Neutral stance is seconded by a Zacks Rank #3 (Hold) for the stock.
Why Neutral?
Dollar Tree is one of the best-positioned dollar store concepts, especially with its evolving multi-price point chain. In order to enhance its market share, the company is transforming itself by building larger stores to accommodate more consumables/basic merchandise.
Moreover, we believe that the company’s sustained focus on price management, cost containment, inventory management, product mix offering and merchandise initiatives will boost its sales and margins further.
We believe that the company is progressing well with its growth endeavors, which include store expansion strategies, omni-channel initiatives, revamping of store formats and venture into new markets. Moreover, we commend Dollar Tree’s strategic investments toward incorporating technological enhancements, which will drive its top and bottom line in the long run.
Dollar Tree has been displaying fabulous comparable-store sales growth despite unfavorable macroeconomic conditions mainly due to competitive pricing and strategic store expansion plans, including remodeling and relocations. Fiscal 2012 represented the 7th consecutive year of comparable-store sales growth.
So far in fiscal 2013, the company has posted 2.1%, 3.7% and 3.1% comps growth for the first, second and third quarters, respectively. For fiscal 2013, Dollar Tree expects comps to increase in the low-single digit range.
Further, Dollar Tree’s accelerated share repurchase program reflects management’s confidence in the business and consistency of its cash flow generation ability.
However, we hold back our positive view on the stock due to the disappointing fiscal 2013 results as earnings per share and sales fell short of the Zacks Consensus Estimate, while margins remained under pressure due to higher operating expenses from ongoing investments to strengthen its omni-channel selling strategy.
Moreover, the stock remains susceptible to the sluggish economic recovery and cautious consumer spending. This has also been reflected in management’s sales and earnings guidance for fiscal 2013. This, in turn, triggered a downtrend in the Zacks Consensus Estimate for the fourth quarter and fiscal 2013, as analysts have become less constructive on the stock’s future performance.
Other Stocks to Consider
Better-ranked stocks in the retail space include Christopher & Banks Corp. (CBK), Finish Line Inc. (FINL) and Abercrombie & Fitch Co. (ANF). Of these, Christopher & Banks has a Zacks Rank #1 (Strong Buy), while Finish Line and Abercrombie & Fitch carry a Zacks Rank #2 (Buy).
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