Dollar Tree (DLTR, Financial), like the rest of the stocks in the dollar store space, is down in value with President Donald Trump’s plan to cut the Supplemental Nutrition Assistance Program (SNAP) by 25%. Will this news fade and the stock be a buy?
The stock trades for $67.94, there are 236.7 million shares outstanding, and the market cap is $16 billion. Last year’s earnings per share was $3.78, and the price-earnings (P/E) ratio is 17.8. There is no dividend. In July 2015, Dollar Tree purchased Family Dollar for $6.8 billion and the issuance of 28.5 million shares.
Sales were $20.719 billion last year. Operating margins are 8% and net income margins are 4.1%. Free cash flow was $1.018 billion and the free cash flow yield is 6.9%. Return on equity was 18.3% last year. That’s excellent, and the company is very profitable.
The balance sheet shows $1.16 billion in cash and $3 billion in property, plant and equipment. Dollar Tree owns most of its distribution centers so there’s some value there. The liability side shows $1.45 billion in payables and $6.3 billion in debt. Management has paid down about $1 billion over the last year, and that’s impressive. That’s the importance of the free cash flow.
There are about 6,400 Dollar Tree stores and 8,000 Family Dollar stores. They are in 48 states and five provinces in Canada. The fixed price point is $1 in the U.S. and $1.25 Canadian dollars in the land of our neighbors to the north. Same-store sales growth grew 1.8%.
As you may know, Dollar Tree sells gum, candy, soda, snacks, sweets, household cleaning supplies, seasonal decorations and other minor things needed around the house. These stores are quicker to shop in than Walmart (WMT, Financial) and are more reasonably priced than a convenience store. Because of low prices and convenience, they seem to be immune from Amazon (AMZN, Financial).
In Barron’s Mid-Year Roundtable, Meryl Witmer noted that the Street has an earnings estimate of $5.50 a share in 2019 which she sees as reasonable. If the stock traded at a P/E ratio of 19, it would trade at $93. When the article came out, the stock was trading at $75 and now is trading close to $68.
The debt is BBB-rated by Standard & Poor's. I found a series of Dollar General bonds due Feb. 1, 2021 and was quite surprised to see that they only yield 2.772%. The bond market seems to have a lot of confidence in the company.
The current problem with dollar store stocks is Trump’s plan to cut SNAP by 25% would most certainly hurt sales. This 25% would be $193 billion. This poses a question. Are the dollar store stocks oversold with the worry about Trump’s cuts to social programs? Good question. There are people on SNAP in every Congressional district so you can see that Congress might be hesitant to make any cuts. Many of these folks never vote because they have no reason to. Perhaps this will give them a reason to vote.
There are many goods at these stores that fall under SNAP such as milk, bacon, canned fruits and vegetables, and water. These stores are convenient to get certain basics but not for fresh fruits and vegetables and meat.
We own Dollar General (DG, Financial) and are about break even. Dollar Tree is another good stock but I’m hesitant about owning too many in this space. All dollar stores are projecting growth but not all will be able to double in size.
It might be a good time to buy stock in Dollar Tree. The stock is down on bad news that may pass, the company is very profitable, earnings have been growing, and management has been paying down debt.
Disclosure: We own shares of Dollar General.
