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Robert Stephens, CFA
Robert Stephens, CFA
Articles (123) 

Why Dollar Tree’s Stock Could Soar

The company’s strategy may lead to a rising valuation

January 31, 2019 | About:

A new store opening program could improve Dollar Tree Inc.'s (NASDAQ:DLTR) stock performance. It is also delivering a store refurbishment program that is increasing comparable sales versus older stores.

A refreshed product lineup that includes a partnership with Hallmark and additional snack zones have proven popular among customers. Further investment in digital opportunities could drive footfall. The continued integration of Family Dollar stores includes new store formats and shared operating models, which could enhance the customer experience.

Although tariffs and an increasingly competitive operating environment are risks facing the business, it appears to have the adaptability to deliver improving financial performance. Having fallen 16% in the last year versus a 5% decline for the S&P 500, Dollar Tree has investment potential.

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Strategy

A new partnership with Hallmark could boost Dollar Tree’s financial prospects. It introduced a refreshed greeting card program, with every store merchandised with a new assortment of cards that have been tailored to different consumer demographics. Customer acceptance and feedback to the program has been positive, with double-digit comparable sales recorded in the most recent quarter.

The company also added snack zones to an additional 300 stores last quarter. The concept targets on-the-go customers with immediate consumption items. Snack zone sales are consistently outperforming the budgets assigned to them. A larger number of private brand offerings and the company’s smart coupon program are also expected to contribute to improved sales performance.

In the most recent quarter, the company opened a total of 127 new stores as part of its plan to increase the size of its estate. It expects to have 325 new Dollar Tree stores and 230 Family Dollar stores over the full year. It is also implementing a renovation program, which included 164 Family Dollar stores last quarter as part of what is expected to be 1,000 renovations in fiscal 2019. Renovated stores are delivering comparable sales growth in the mid- to high-single-digits versus a 0.4% fall last quarter for the overall Family Dollar estate.

Evolving business

Further progress is expected to be delivered in the company’s e-commerce segment. Its digital sales are increasingly profitable, with existing infrastructure due to be leveraged to convert rising sales to bottom-line growth. Online promotions, such as a campaign to mark the launch of Hallmark cards in stores, are expected to be utilized more frequently in order to increase footfall.

Investment in the integration of Family Dollar following its acquisition in 2015 is set to continue. The company has implemented a shared services model across its business units, which is expected to improve logistic and supply chain efficiencies. It is introducing programs to enhance the sales culture of store staff, while improving adjacencies in the merchandising of key impact categories. It is also testing new store formats while launching a customer-facing marketing program called "Smart Ways to Save" as it aims to improve the customer experience.

Risks

The potential for further tariffs could negatively impact Dollar Tree's financial outlook. Since it has a highly price-sensitive customer base, it may be unable to pass increased costs on to consumers, which could hurt its margins. It is also facing increasing competitive pressures from European grocers Aldi and Lidl. Both companies have ambitious expansion plans in the U.S. and their money-saving offers may prove to be popular among consumers.

Dollar Tree sources its products from over 24 countries. This means it has a degree of flexibility in its manufacturing footprint, which could allow it to lessen the impact of tariffs. It is also set to negotiate concessions from vendors, change product size and evolve its product mix. It has mitigated the potential impact of tariffs by 80% for fiscal 2019. Although Aldi and Lidl pose a potential threat to the business, so far they have been targeting supermarkets rather than the discount retail sector. 

Outlook

An increase in the number of stores and a renovation program could improve Dollar Tree’s financial outlook. The company is seeking to leverage its online opportunities to drive footfall. It is also continuing the integration of Family Dollar stores, with shared operating models and a new store format expected to drive comparable sales higher.

A refreshed strategy focusing on partnerships and the introduction of snack zones as well as private brands could enhance the customer experience. Although competition is high and increasing tariffs could threaten margins, a flexible manufacturing footprint and a focus on the deep-discount segment could lead to improving prospects. Having underperformed the S&P 500 in the last year, Dollar Tree could deliver capital growth.

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