Preview: Will Dollar Tree Beat Estimates Again?

Dollar Tree, a leading operator of discount variety stores, is expected to deliver a year-over-year decline in earnings on Wednesday when it reports results for the holiday quarter ended January 2022.

The Chesapeake, Virginia-based company is expected to report earnings of $1.78 per share in the fourth quarter, down over 16% from $2.13 per share seen in the same period a year ago.

But the discount variety stores that sells items for $1 or less would post revenue growth of more than 5% to $7.13 billion. It is worth noting that the company has consistently beaten consensus earnings estimates in the last two years, at least.

“While no-moat Dollar Tree should benefit from a price increase at its namesake banner (to $1.25 from $1), with potential additional opportunity from activist investor Mantle Ridge’s involvement, we are unenthusiastic about the stock at its current trading price (around 20% above our revised $111 per share valuation, which is up from $106 mostly to reflect the time value of money),” noted Zain Akbari, Equity Analyst at Morningstar.

“Instead, investors looking to capitalize on discount retailers’ appeal in an inflationary economy should look to off-price chains.”

Dollar Tree stock traded over 1% higher at $143.91 on Tuesday. The stock rose nearly 2% so far this year after surging more than 30% in 2021.

Analyst Comments

“While supply chain disruptions and associated costs are top of mind given the unexpected magnitude of these costs in 2Q and ongoing impact in 3Q, we believe that Dollar Tree’s price-increase initiative will likely be a focal point for investors,” noted Randal J. Konik, equity analyst at Jefferies.

“More specifically, we think investors will look to better understand customer receptivity to these price increases, the degree to which these price increases can mitigate the aforementioned supply chain costs, and to what extent the company is utilizing higher price point items to diversify merchandising and sourcing.”

Dollar Tree Stock Price Forecast

Eleven analysts who offered stock ratings for Dollar Tree in the last three months forecast the average price in 12 months of $167.10 with a high forecast of $181.00 and a low forecast of $147.00.

The average price target represents a 16.85% change from the last price of $143.00. Of those 11 analysts, nine rated “Buy”, two rated “Hold”, while none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $150 with a high of $220 under a bull scenario and $90 under the worst-case scenario. The investment bank gave an “Equal-weight” rating on the discount store operator’s stock.

“We are EW with a balanced (and uncertain) R/R skew. Earnings power looks relatively intact amidst COVID-19 disruption, with sales accelerations (especially at FDO) partially offset by incremental expenses and margin headwinds. Inconsistent results (especially at FDO) and limited EPS visibility keep us on the sidelines. Underlying Dollar Tree (DLTR) results should be steady while FDO sales can improve, driven by “H2” renovations,” noted Simeon Gutman, equity analyst at Morgan Stanley.

“Cost headwinds (freight, wages, shrink, and tariffs) may continue to weigh on profitability. Favourable skew of macro-outcomes: Dollar Tree (DLTR) benefits in a recession while gaining share in a low-growth environment. Store growth potential remains, but likely slower than prior history.”

Several analysts have also updated their stock outlook. UBS raised the target price to $175 from $170. Deutsche Bank lifted the price objective to $176 from $171. Telsey Advisory Group upped the target price to $180 from $175.

Technical analysis suggests it is good to buy as 100-day Moving Average and 100-200-day MACD Oscillator gives a strong buying opportunity.

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