Company Overview: Dollar Tree Inc. (NASDAQ: DLTR) has its headquarters in Chesapeake, Virginia, and was founded in 1986. The company carries on its business as an operator of discount variety stores providing retail and other assortments of services. The company’s stores effectively run in key metropolitan areas, mid-sized cities as well as small towns. As of May 1, 2021, Dollar Tree conducted 15,772 stores across 48 states and 5 Canadian provinces.  

DTLR Details

Geographical Expansion and New Stores Opening Aid DLTR: Dollar Tree Inc. (NASDAQ: DLTR) is engaged in offering a broad range of general merchandise quality on an everyday basis in various categories, which consist of housewares, candy, seasonal goods, food, toys, beauty and health beauty care, gifts, stationery, books, and other consumer items. DLTR owns and operates DollarTree.com, an e-commerce platform, which markets its merchandise in volume to individual customers and small and medium businesses along with various organizations. Notably, on July 6, 2015, the company bought Family Dollar Stores, Inc.  DLTR has two reportable segments, namely (1) Dollar Tree and (2) Family Dollar.

The company remains on track to gain from robust top-line progress, strong growth in comparable store sales (comps), enhanced gross margin and lower expenses. Further, potency in both the segments (Dollar Tree and Family Dollar) is likely to aid solid comps performance in the days ahead. Moreover, the company expects to boost its top-line and bottom-line, thanks to its store streamlining and renovation attempts, supported by the accomplishment of the H2 program, Dollar Tree Plus! plans, Crafter’s Square, and newly unveiled Combination store format. This apart, continuous store openings and enhancements of distribution centers as part of its restructuring and expansion initiatives are expected to further bolster financial performance of the company.

Coming to the first quarter of fiscal 2021 performance, the company opened 106 stores and expanded 36 outlets. Notably, number of stores closed during the quarter stood at 19. DLTR successfully completed the restoration of 414 Family Dollar stores to the H2 format in 1QFY21. The company conducted 15,772 stores in 48 states as well as 5 Canadian provinces as at May 1, 2021. For FY21, the company intends to start 600 stores, out of which 400 stores will be Dollar Tree and the rest will be Family Dollar stores, comprising of both H2 and Combination Store formats. Also, DLTR anticipates achieving 1,250 Family Dollar H2 restorations in FY21.

Stores Highlights; Analysis by Kalkine Group 

1QFY21 Key Results Highlights: During the quarter, the company reported earnings of $1.60 per share, which increased a whopping ~53.8% from the prior corresponding period. In 1QFY21, consolidated net sales stood at $6,476.8 million, depicting a rise of 3% on pcp. Enterprise same-store sales (comps) during the quarter inched up 0.8% on a constant-currency basis. Gross profit in 1QFY21 came in at $1,964.1 million, up 9.4% on a year over year basis. The company witnessed a gross margin expansion of 180 bps to 30.3%in 1QFY21, owing to favorable sales mix, lower markdowns, and better shrink. Markedly, gross margin expanded 100 bps at Dollar Tree and 140 bps at Family Dollar segments. Lower COVID-19 associated costs led a decline of 40 bps year over year in selling, general and administrative expenses as a percentage of sales. In 1QFY21, operating income came in at $519.9 million, up 42.1% year over year.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Key Metrics, Liquidity & Balance Sheet Details: The company exited the quarter with a cash balance of $1,473.9 million. At the end of 1QFY21, DLTR witnessed an increase of ~12.7% year over year in net merchandise inventories, which came in at $3,604.6 million. Net long-term debt (excluding current maturities) stood at $3,227.8 million as of May 1, 2021. During the quarter, the company repurchased 2,150,572 shares worth $250 million. The company currently has $2.15 billion remaining under its existing authorization. 

In 1QFY21, operating and net margins stood at 8% and 5.8%, higher than year ago figures of 5.8%, and 3.9%, respectively. In 1QFY21, ROE stood at 5.1%, higher than the industry median of 4.4%. Debt to equity of the company stood at 0.44x in 1QFY21, lower than the industry median of 0.66x.

Profitability and Leverage Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 38.2% of the total shareholdings, while the top 4 constitutes the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 10.57% and 5.14%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: On the flip side, an increase in COVID-19 related expenditure, higher distribution costs, payment of incremental bonuses may have a denting effect of the company’s margins, going forward. Also, stiff competition from peers adds to the woes. Further, decline in consumer preference and their spending power, owing to unfavorable economic conditions, may impact DLTR’s business and results of operations. Further, tariffs or restrictions on trade or disruptions, owing to COVID-19 led pandemic, could negatively affect DLTR’s business operations.

Outlook: For FY21, the company expects adjusted earnings to be in the range of $5.80-$6.05 per share. Looking forward, strong growth in same-store sales, lower costs, restructuring activities, improved technologies, enhancing store maintenance, and portfolio optimization are likely to act as growth catalysts. The company remains positive regarding its Dollar Tree Plus!, owing to positive responses from its customer. Also, the company’s recently launched Combination, Store concept is expected to positively impact quarterly’s sales and margins in the near-term.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last one month, the stock went down by ~14.79%. The stock made a 52-week low and high of $84.41 and $120.37, respectively. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight discount as compared to its peer’s median, considering the higher COVID-19 related expenditure, stiff competition from peers, decline in consumer preference and their spending power along with restrictions on trade or disruptions. We have taken peers like Dollar General Corp (NYSE: DG), Costco Wholesale Corp (NASDAQ: COST), to name a few.  Considering the company’s decent 1QFY21 performance, geographical expansion, new store opening, encouraging outlook, current trading levels, and valuation, we give a “Buy” recommendation on the stock at the closing price of $98.87, down by ~2.41% on 9 June 2021.  

DLTR Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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