Dollar Tree (DLTR) in Investors' Good Books: Time to Hold?

Dollar Tree DLTR has been gaining from its robust surprise trend accompanied by strong comparable store sales (comps) and improved margins. Also, the company is benefiting from the integration of Family Dollar. However, volatile consumer environment, intense competition and significant global exposure remain impediments.

Shares of the company gained 24.9% in the past three months, outperforming the industry’s growth of 21.4%. Let’s analyze the pros and cons of this Zacks Rank #3 (Hold) company.

Robust Surprise Trend and Solid Q3 Result: Outlook Raised

Dollar Tree has been posting robust earnings and sales surprise trends in the recent quarters. The company’s top and bottom-line results for third-quarter fiscal 2017 marked its second straight earnings and sales beat. Results were fueled by significant comps growth and improved margins. Comps improved for the 39th straight quarter while reduced merchandise costs, lower markdowns and occupancy expenses aided margins. Also, positive impact from Canadian currency fluctuations aided results.

Driven by the robust third quarter and progress on Family Dollar integration, the company raised guidance for fiscal 2017. Also, it provided a bullish view for the fourth quarter. Management is anticipating earnings per share to be in range of $4.64-$4.73. Also, consolidated sales are projected to lie within the band of $6.32-$6.43 billion, driven by comps growth in a low-single digit rise range for the combined entity.

Remarkable Comps Growth

Dollar Tree’s comps have been benefiting from strategic store expansion plans, including remodeling and relocations and competitive pricing. The company continues with the positive trend as is evident from consolidated comps growth of 3.2% in the third-quarter fiscal 2017 and 3.3% in constant-currency.Comps growth in the quarter can be attributed to improved customer count and average ticket. While Dollar Tree banner posted comps growth of 5% (in constant-currency), the same at the Family Dollar banner increased 1.5%.

Store Expansion Bodes Well

Currently, Dollar Tree is concentrating on expanding its store base and incorporating technological advancements. During third-quarter fiscal 2017, the company opened 169 new stores and expanded or relocated 23 stores. Consequently, it ended the quarter with 14,744 stores-including 6,604 Dollar Tree and 8,140 Family Dollar outlets. Further, the company remains on track to operate over 10,000 Dollar Tree and over 15,000 Family Dollar outlets across the United States.

Integration With Family Dollar

Dollar Tree is also gaining from the integration of Family Dollar, which was acquired in July 2015. Notably, sales from the Family Dollar banner represented nearly 50% of the company’s consolidated sales in the third quarter.

Additionally, Dollar Tree is undertaking significant store renovation initiatives for Family Dollar to attract more customers. Consequently, the company has renovated 191 Family Dollar stores in the third quarter and intends to complete 350 renovations in fiscal 2017.

While increased costs and cannibalization during the integration and re-banner process are expected to weigh on the company results for some time, it expects to generate annual run rate synergies worth at least $300 million by the end of the third year of this acquisition. The combined chain, on the completion of the integration, will be positioned to reach out to more value-seeking consumers through a network spanning across vast geographies.

Bottom Line

While all seems well, Dollar Tree has been facing problems regarding highly competitive market and volatile consumer behavior. Also, significant global exposure poses serious threats toward the company performance. However, we believe the company’s strategies will be able to offset these headwinds.

Do Retail-Wholesale Stocks Grab Your Attention? Check These

Investors interested may consider American Eagle Outfitters Inc. AEO, Beacon Roofing Supply Inc. BECN and Ross Stores Inc. ROST. While American Eagle and Beacon Roofing flaunts a Zacks Rank #1 (Strong Buy), Ross Stores carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

American Eagle Outfitters Sports delivered an average positive earnings surprise of 2.3% in the trailing four quarters. It has a long-term earnings growth rate of 7.5%.

Beacon pulled off an average positive earnings surprise of 6.4% in the trailing four quarters. In addition, it has a long-term earnings growth rate of 15%.

Ross Stores delivered an average positive earnings surprise of 5.4% in the trailing four quarters. It has a long-term earnings growth rate of 10%.

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