Shares of
Dollar Tree (NASDAQ: DLTR) slipped a little at the end of June as the company cut its financial outlook for the remainder of the year.
The company cites a strategy to offer more competitive prices across its Family Dollar stores—at a time when many Americans are struggling to stretch their dollars—as one factor in their downgrade. Indeed, even the discount chains are having a hard time. For example,
Wal-Mart (NYSE: WMT) drastically underperformed last year; and even online retail giant
Amazon (NASDAQ: AMZN) is currently cutting its outlook as well. Also, Walmart and
Target (NYSE: TGT) have been cutting prices to liquidate excess stock that was compiled during the pandemic.
Overall, then, it has been a tough year for retail; so while Dollar Tree may be struggling a little, the shift could be more cautionary than revealing of any potential issues.
A Strong Start to the Year
In a statement, Dollar Tree Chief Executive Officer and President Mike Witynski explains, “Our second quarter performance reinforces the relevance of our brands for millions of households pressured by higher costs for food, fuel, rent, and more.” This, he goes on to say, helped the company to deliver nearly 7 percent higher sales, more than 14 percent more gross profit, and almost 26 percent higher operating profit.
Moving forward, then, Dollar Tree now hopes to focus on various aspects of the company including labor, the DC network, technology, and—of course—the supply chain, as well as fulfilling their value proposition. All of this aims to improve shopper experience and, most importantly, deliver long-term profitable growth and more attractive capital returns.
That in mind, nearly two dozen analysts offering 12-month price target over the past three months advise their loss could be an investor's gain right now, giving Dollar Tree a MODERATE BUY rating. Considered to be overweight, some analysts might even rate it a little stronger. This rating comes with a Median target price target around $170, with a high estimate of $187 and a low estimate of $145.
New Direction Leads to Higher Hopes
You may recall that it has been not even a year since Dollar Tree implemented a higher base price for the first time in the company's nearly four-decade history. Since 1986 the company has offered all items in their hallowed halls for no more than $1. In September of last year, though, they introduced $1.25 and $1.50 items at their legacy stores. Soon after, the company expanded their “Dollar Tree Plus!” department which offered certain cleaning, crafting, and home décor items in the $3 to $5 range.
The following November saw the company move to a $1.25 standard base price point at all of its 16,000+ stores across the United States. The hope was that this would allow them to expand the kinds of products they can procure and offer. Unfortunately this led to the closure of 400 stores in February, following rumors that activist investor Mantle Ridge LP aims to replace the company's eleven board members. After some eventual restructuring a few months later, Dollar Tree announced higher numbers across the board: consolidated net sales, gross profit, and EPS (Q1 of fiscal 2022).
Recent Earnings Slow, Lowering Outlook
Fortunately for Dollar Tree, Earnings Per Share (EPS) has been consistent for the better part of the past year. In the third quarter of 2021, for instance, analysts estimated a range of $0.89 to $1.14 with a consensus estimate of $0.96, which the reported earnings met. In the following quarter, though, the reported earnings of $2.01 beat not only the consensus estimate but also the whole range.
In Q1 of 2022 the $2.37 reported earnings were equally excellent, settling just a couple cents shy of beating the range again. The most recent report (Q2 of 2022) shows that the current diluted EPS is an increase of at least 30 percent. At the same time, while the $1.6 EPS met the consensus estimate, it was still at the lower end of the range, indicating that value is definitely slowing.
On an annual basis, Dollar Tree earnings has also consistently met or beat the consensus estimate between 2018 and 2021. In fact, 2019 was the only year that reported earnings did not beat the consensus estimate. In 2021, though, the reported annual $5.8 earnings per share beat the entire range, which is likely the reason for the lowered guidance moving into the final quarter of 2022. Things are certainly not progressing as they had hoped. Accordingly, the reduced guidance aims to get things back on track.
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