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Dollar Tree Slips 34% in 3 Months: Solid Bargain or Risky Bet?
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Dollar Tree, Inc. (DLTR - Free Report) stock has plummet 33.5% in the past three months against 0.6% and 2.6% growth of the industry and the S&P 500, respectively. This decline can be traced to tough broader market dynamics and specific challenges faced by the company. Investors are currently divided on whether the stock is set for a further decline or is on the verge of a recovery.
Image Source: Zacks Investment Research
At the current price of $70.44, the stock is hovering near its 52-week low of $60.82. Let us take a closer look at the company's fundamentals, market position and prospects to determine the best course of action for investors.
The DLTR stock has fallen below critical technical thresholds, including its 50-day and 200-day moving averages. The moving average is a key indicator for gauging market trends and momentum. The breach of this threshold heightens investor concerns about the stock’s short-term outlook and signals the potential for further downside if these levels are not reclaimed.
What’s Dragging the DLTR Stock Down?
Dollar Tree, which caters to a broader customer base including middle and upper-income households, has been witnessing pressures from inflation, higher interest rates and other macroeconomic pressures, resulting in changes in customer's purchase behavior. This impacted comparable sales (comps) performance in second-quarter fiscal 2024, which improved only 0.7%.
The company is also faced with troubles in Family Dollar segment, which targets lower-income customers. DLTR noted that spending trends among low-income consumers have been soft, leading to reduced discretionary spending trends. These customers are witnessing the pressures due to reduced SNAP benefits by the government.
The soft discretionary spending trends, along with lower tax refunds, impacted the comps performance of Family Dollar in the fiscal second quarter. Comps at Family Dollar dipped 0.1%, with discretionary comps falling 1.7% in the quarter. Reduced SNAP benefits were a 60-basis point headwind for the segment.
DLTR has been struggling with elevated selling, general and administrative (SG&A) expenses for the past few quarters. The higher SG&A expenses are attributed to factors such as general liability adjustment, higher depreciation, temporary labor at the Dollar Tree segment to aid multi-price rollout, increased utility costs and sales deleverage. This resulted in reduced operating income in the last reported quarter. Adjusted operating income declined 24.2% year over year, with operating margin contracting 90 bps.
DLTR’s Full-Year Outlook Trimmed
The soft business trends at Family Dollar and a tough macro landscape led the company to revise its fiscal 2024 view. The outlook also includes a general liability charge related to the incremental start-up expenses for the conversion of the acquired portfolio of 99 Cents Only Stores leases.
DLTR expects enterprise sales of $30.6-$30.9 billion for fiscal 2024, with comps growth estimated to be in the low-single-digits for the enterprise as well as for Dollar Tree and Family Dollar segments.
Dollar Tree’s earnings will be impacted by incremental upfront costs related to 99 Cents Only lease acquisition, reducing EPS by 7 cents in the third quarter and 5 cents in the fourth quarter of fiscal 2024. Additionally, 12 cents in depreciation and amortization costs will be evenly split between the two quarters. As a result, the company has revised adjusted EPS to be $5.20-$5.60 for fiscal 2024, down from the earlier estimated range of $6.50-$7.00.
DLTR’s Earnings Estimates Follow Suit
DLTR is currently in a tough spot. The Zacks Consensus Estimate for EPS has seen downward revisions. In the past 30 days, the consensus estimate for the current and the next fiscal years has been decreased 17.7% to $5.33 and 20.3% to $6.04 per share, respectively.
Image Source: Zacks Investment Research
Can DLTR’s Strategy Uplift Performance?
Despite these headwinds, DLTR remains confident in its segment’s ability to compete and succeed. Dollar Tree offers exceptional value to its customers, which aligns well with the current economic environment. The company strongly believes in the strength of its unique business model and long-term strategy focused on multi-price expansion and accelerated store growth.
Dollar Tree has made great strides in optimizing its store portfolio through new openings, renovations, re-banners and closures. The company is seeing strong results from its Key Real Estate Initiatives, which include expanding the $3 and $5 Plus assortment in Dollar Tree stores and Combo Stores. The company’s restructuring and expansion initiatives, as evident from steady store openings and improvement of distribution centers are likely to drive revenues.
Unlocking DLTR’s Valuations
Although DLTR’s stock is currently trading at a discount compared with its industry peers, this valuation disparity might not be as advantageous as it seems. The lower price could signal underlying problems rather than indicating a straightforward investment opportunity.
DLTR is currently trading at a discount to its industry benchmarks. The stock has a forward 12-month P/E ratio of 12.13X compared with the industry’s 29.48X.
Image Source: Zacks Investment Research
DLTR’s Investment Analysis
The above discussion raises doubts about DLTR’s investment potential. The revised outlook reflects lower sales projections, incremental cost and general liability claims, which keeps investors concerned. The near-term pressures indicate that it can be quite risky to invest in this Zacks Rank #5 (Strong Sell) stock at this time. Existing investors should assess whether to maintain or modify their position based on the company’s ability to overcome its short-term difficulties and capitalize on DLTR’s long-term strategies.
Sprouts Farmers engages in the retailing of fresh, natural and organic food products under the Sprouts brand in the United States. SFM has a trailing four-quarter earnings surprise of nearly 12%, on average.
The Zacks Consensus Estimate for Sprouts Farmers’ current-fiscal year’s sales and earnings indicates growth of 9.6% and 18.7%, respectively, from the year-ago reported numbers.
Burlington Stores operates as a retailer of branded merchandise in the United States. BURL has a trailing four-quarter earnings surprise of 18.4%, on average.
The Zacks Consensus Estimate for Burlington Stores’ current-financial year’s sales and earnings implies a rise of 10.1% and 30.5%, respectively, from the year-earlier reported figures.
Chewy engages in the pure-play e-commerce business in the United States. CHWY has a trailing four-quarter earnings surprise of 50.9%, on average.
The Zacks Consensus Estimate for Chewy’s current-financial year’s sales and earnings indicates an increase of 5.7% and 65.2%, respectively, from the year-ago reported numbers.
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Dollar Tree Slips 34% in 3 Months: Solid Bargain or Risky Bet?
Dollar Tree, Inc. (DLTR - Free Report) stock has plummet 33.5% in the past three months against 0.6% and 2.6% growth of the industry and the S&P 500, respectively. This decline can be traced to tough broader market dynamics and specific challenges faced by the company. Investors are currently divided on whether the stock is set for a further decline or is on the verge of a recovery.
Image Source: Zacks Investment Research
At the current price of $70.44, the stock is hovering near its 52-week low of $60.82. Let us take a closer look at the company's fundamentals, market position and prospects to determine the best course of action for investors.
The DLTR stock has fallen below critical technical thresholds, including its 50-day and 200-day moving averages. The moving average is a key indicator for gauging market trends and momentum. The breach of this threshold heightens investor concerns about the stock’s short-term outlook and signals the potential for further downside if these levels are not reclaimed.
What’s Dragging the DLTR Stock Down?
Dollar Tree, which caters to a broader customer base including middle and upper-income households, has been witnessing pressures from inflation, higher interest rates and other macroeconomic pressures, resulting in changes in customer's purchase behavior. This impacted comparable sales (comps) performance in second-quarter fiscal 2024, which improved only 0.7%.
The company is also faced with troubles in Family Dollar segment, which targets lower-income customers. DLTR noted that spending trends among low-income consumers have been soft, leading to reduced discretionary spending trends. These customers are witnessing the pressures due to reduced SNAP benefits by the government.
The soft discretionary spending trends, along with lower tax refunds, impacted the comps performance of Family Dollar in the fiscal second quarter. Comps at Family Dollar dipped 0.1%, with discretionary comps falling 1.7% in the quarter. Reduced SNAP benefits were a 60-basis point headwind for the segment.
DLTR has been struggling with elevated selling, general and administrative (SG&A) expenses for the past few quarters. The higher SG&A expenses are attributed to factors such as general liability adjustment, higher depreciation, temporary labor at the Dollar Tree segment to aid multi-price rollout, increased utility costs and sales deleverage. This resulted in reduced operating income in the last reported quarter. Adjusted operating income declined 24.2% year over year, with operating margin contracting 90 bps.
DLTR’s Full-Year Outlook Trimmed
The soft business trends at Family Dollar and a tough macro landscape led the company to revise its fiscal 2024 view. The outlook also includes a general liability charge related to the incremental start-up expenses for the conversion of the acquired portfolio of 99 Cents Only Stores leases.
DLTR expects enterprise sales of $30.6-$30.9 billion for fiscal 2024, with comps growth estimated to be in the low-single-digits for the enterprise as well as for Dollar Tree and Family Dollar segments.
Dollar Tree’s earnings will be impacted by incremental upfront costs related to 99 Cents Only lease acquisition, reducing EPS by 7 cents in the third quarter and 5 cents in the fourth quarter of fiscal 2024. Additionally, 12 cents in depreciation and amortization costs will be evenly split between the two quarters. As a result, the company has revised adjusted EPS to be $5.20-$5.60 for fiscal 2024, down from the earlier estimated range of $6.50-$7.00.
DLTR’s Earnings Estimates Follow Suit
DLTR is currently in a tough spot. The Zacks Consensus Estimate for EPS has seen downward revisions. In the past 30 days, the consensus estimate for the current and the next fiscal years has been decreased 17.7% to $5.33 and 20.3% to $6.04 per share, respectively.
Image Source: Zacks Investment Research
Can DLTR’s Strategy Uplift Performance?
Despite these headwinds, DLTR remains confident in its segment’s ability to compete and succeed. Dollar Tree offers exceptional value to its customers, which aligns well with the current economic environment. The company strongly believes in the strength of its unique business model and long-term strategy focused on multi-price expansion and accelerated store growth.
Dollar Tree has made great strides in optimizing its store portfolio through new openings, renovations, re-banners and closures. The company is seeing strong results from its Key Real Estate Initiatives, which include expanding the $3 and $5 Plus assortment in Dollar Tree stores and Combo Stores. The company’s restructuring and expansion initiatives, as evident from steady store openings and improvement of distribution centers are likely to drive revenues.
Unlocking DLTR’s Valuations
Although DLTR’s stock is currently trading at a discount compared with its industry peers, this valuation disparity might not be as advantageous as it seems. The lower price could signal underlying problems rather than indicating a straightforward investment opportunity.
DLTR is currently trading at a discount to its industry benchmarks. The stock has a forward 12-month P/E ratio of 12.13X compared with the industry’s 29.48X.
Image Source: Zacks Investment Research
DLTR’s Investment Analysis
The above discussion raises doubts about DLTR’s investment potential. The revised outlook reflects lower sales projections, incremental cost and general liability claims, which keeps investors concerned. The near-term pressures indicate that it can be quite risky to invest in this Zacks Rank #5 (Strong Sell) stock at this time. Existing investors should assess whether to maintain or modify their position based on the company’s ability to overcome its short-term difficulties and capitalize on DLTR’s long-term strategies.
Stocks to Consider
Here, we have highlighted three better-ranked stocks, namely Sprouts Farmers Market, Inc. (SFM - Free Report) , Burlington Stores, Inc. (BURL - Free Report) and Chewy, Inc. (CHWY - Free Report) , currently carrying a Zacks Rank # 2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Sprouts Farmers engages in the retailing of fresh, natural and organic food products under the Sprouts brand in the United States. SFM has a trailing four-quarter earnings surprise of nearly 12%, on average.
The Zacks Consensus Estimate for Sprouts Farmers’ current-fiscal year’s sales and earnings indicates growth of 9.6% and 18.7%, respectively, from the year-ago reported numbers.
Burlington Stores operates as a retailer of branded merchandise in the United States. BURL has a trailing four-quarter earnings surprise of 18.4%, on average.
The Zacks Consensus Estimate for Burlington Stores’ current-financial year’s sales and earnings implies a rise of 10.1% and 30.5%, respectively, from the year-earlier reported figures.
Chewy engages in the pure-play e-commerce business in the United States. CHWY has a trailing four-quarter earnings surprise of 50.9%, on average.
The Zacks Consensus Estimate for Chewy’s current-financial year’s sales and earnings indicates an increase of 5.7% and 65.2%, respectively, from the year-ago reported numbers.