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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Dollar Tree: Zero Upside Potential

Despite the year-to-date sell off, investors should avoid the stock through 2020

September 25, 2018 | About:

With a looming recession that few are talking about, discount variety stores will do just fine. Obviously, many big money managers think Dollar Tree (NASDAQ:DLTR) is a good investment as well, with Jim Simons (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and David Einhorn (Trades, Portfolio) owning small positions in the stock. However, there are three guru investors that have bet heavily on Dollar Tree's stock.

Steve Mandel (Trades, Portfolio) owns 7.2 million shares (3.25% of AUM), Chuck Akre owns 5 million shares (5.4% of AUM), Lee Ainslie (Trades, Portfolio) owns 4.25 million shares (4.23% of AUM), and each has added to his position based on the last quarterly filing.

The company is one of America's largest discount retailers with over 14,000 Dollar Tree and Family Dollar stores across the U.S. And, along with Dollar General (NYSE:DG), it has a quasi-duopoly on the market.

Their stores fill a gap that big discounters like Walmart never will. The average store size is about 8,000 square feet, primarily in small suburban towns. At Dollar Tree, all items are $1, with half of sales coming from consumables. At Family Dollar, which Dollar Tree acquired in 2015, prices range from $1 to $10 with the majority of revenue, 75%, coming from consumables.

The stock got hit in late August when the retailer reported earnings. During the quarter, sales were up 4.7% year-over-year and net income rose to $274 million, up 17% from the year before. Dollar Tree also lowered its guidance for the fiscal year to a range of $4.85 to $5.05 from a range of $4.80 to$5.10. This guidance pushed the stock down 15%, not because of the small revision, but because its main rival Dollar General saw sales rise 11% in the same quarter. The issue is with Family Dollar, which across its 8,000 stores produced flat same-store sales growth for the company. It would be shocking if Dollar Tree didn't get Family Dollar stores in line and growing again.

Financial comparison

Dollar Tree
Stores: 15,073
Revenue: $22.76 billion
Income: $1.71 billion
Debt: $5.0 billion
Cash: $647 million
Cap: $20.1 billion

Dollar General
Stores: 15,015
Revenue: $24.59 billion
Income: $1.74 billion
Debt: $2.78 billion
Cash: $265 million
Cap: $28.6 billion

Both companies continue to grow, but is Dollar General worth $8.5 billion more? That is a 42% higher valuation for essentially the same financial performance. Dollar Tree is still expected to earn over $6 per share in 2019, which puts the forward multiple below 14x, while Dollar General's forward price-earnings ratio is 16.7.

Yet the best case is that Dollar Tree earns $6 a share and is priced at the same level as Dollar General. Of course, that only puts the stock at $100, a 17% gain from today's price. What's more likely to happen, considering Dollar Tree likely won't produce that high of sales and earnings growth over the next year is that the shares will price in around 14-15x, barring a recession. Since there's no dividend to entice investors to buy and wait, the price has little upside from here.

Disclosure: I am not long/short any stock mentioned in this article.

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website

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