Why Hold Strategy is Apt for Dollar Tree (DLTR) Stock Now?

Shares of Dollar Tree, Inc. DLTR have lost 9.4% since the company reported lower-than-expected first-quarter fiscal 2018 results on May 31. Also, management’s trimmed earnings forecast for fiscal 2018 and higher SG&A expenses are hurting investors’ sentiment.

A glance at the company’s share price performance shows that it has declined 17.6% year to date against the industry’s rally of 11.6%. The stock’s dismal run is also evident from its Momentum Score of F, which indicates that the chances of recovery are bleak.

 

What’s Hurting the Stock?

Dollar Tree’s first-quarter fiscal 2018 results marked its second straight sales and earnings miss. Furthermore, deleverage in SG&A rate owing to higher labor expenses, store payroll costs and utilities expenses are weighing on margins. Evidently, gross margin in the quarter contracted mainly due to increased shrink, distribution and occupancy expenses. Lower gross margin coupled with increased expenses weighed on the operating margin that declined year over year.

Additionally, analysts are becoming bearish on the stock as apparent from the downward revisions in its earnings estimates. The Zacks Consensus Estimate of $5.58 for fiscal 2018 and $6.26 for fiscal 2019 moved south 7 cents and 13 cents, respectively, in the last 30 days. Also, the estimate of $1.15 for the fiscal second quarter revised downward by 3 cents in the last 30 days. Management now envisions earnings per share in the range of $4.80-$5.10 for fiscal 2018, down from $5.25-$5.60 guided earlier. Earnings for the impending quarter are envisioned in the range of $1.07-$1.16 per share.

This apart, Dollar Tree is facing higher freight and fuel cost related challenges, which is expected to continue. Also, the company operates in the highly competitive discount retail merchandise sector. Consequently, it faces stiff competition from well-known industry players. This, in turn, might hurt the company’s top line and profitability.

Is There Any Upside Potential?

Though the aforesaid factors reveal Dollar Tree’s darker side, its ongoing integration of Family Dollar, which represented nearly 50% of the company’s consolidated sales in first-quarter fiscal 2018, is noteworthy. In addition, the company is undertaking significant store renovation initiatives for Family Dollar to attract more customers. While the increased costs and cannibalization during the integration and re-banner process are expected to weigh on the company’s 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.

In fact, Dollar Tree has become a mega U.S. discount with this transaction. The combined chain is positioned to reach out to more value-seeking consumers through a network spanning across vast geographies. Further, the company offers broader and multiple assortments at more compelling prices and is better positioned to negotiate with suppliers.

Moreover, Dollar Tree remains committed toward expanding its store base while incorporating technological advancements. The company also leverages an extensive network of stores to effectively penetrate targeted markets, which is expected to generate increased sales and market share. Notably, the company added the Snack Zone to 214 Dollar Tree stores in the fiscal first quarter and plans to launch this into 750 Dollar Tree stores in fiscal 2018. In fact, management remains on track to operate over 10,000 Dollar Tree and over 15,000 Family Dollar outlets across the United States in the long term.

Also, the company’s focus on consumables and discretionary categories, and the everyday low-price model are expected to boost traffic. We believe that this Zacks Rank #3 (Hold) company’s strategic initiatives will take time to overcome the challenges.

Want Top-Ranked Retail Stocks? Check These

Urban Outfitters, Inc. URBN has pulled off an average positive earnings surprise of 19.8% in the last four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shoe Carnival, Inc. SCVL, also a Zacks Rank #1 stock, has a long-term earnings growth rate of 12%.

Burlington Stores, Inc. BURL delivered an average positive earnings surprise of 17.8% in the trailing four quarters and carries a Zacks Rank #2 (Buy).

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