Dollar Tree (DLTR) sees a fruitful year ahead. Should you buy the stock?

The retail market is passing through a transformational phase as customers’ shopping habits keep shifting, but discount stores have remained a favorite among American households despite the change in trends. While a decline in spending power drove people to dollar stores during the pandemic, high inflation is adding to the sales boom this year.

Dollar Tree, Inc. (NASDAQ: DLTR) recorded strong sales and profit growth in the early months of the year. Last week, the company’s stock rallied and bounced back from the recent lows after it published stronger-than-expected first-quarter results. The management predicts mid-single-digit comparable-store sales growth for the full fiscal year. Earlier, the shares of Dollar Tree and its discount-store peers had plummeted after retail majors Walmart and Target reported weak comparable sales and a decline in earnings.

High Demand

In the current market scenario, customers have many reasons to choose discount stores for their daily shopping, like the slow economic recovery, inflationary pressures, restricted access to credit, and lingering uncertainties from the pandemic. Like in every economic crisis, low-income families and a section of the middle-class shop at retail stores that offer discounts.

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Read management/analysts’ comments on quarterly reports

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Dollar Tree’s management has reaffirmed its commitment to value retailing, at a time when discount stores, in general, are revising their strategy by adding higher-priced merchandise to breach the $1-dollar barrier. After rolling out its $3 and $5 items, the company is expanding those categories across all major stores in the U.S. It is evident that the company owes the positive sales momentum to competitive pricing. Efforts are on to revive the lagging Family Dollar segment by offering good value to customers.

Liquidity

The company maintains a strong balance sheet with healthy cash flow and that comes in handy while making investments aimed at improving the associate/shopper experience — currently, the focus is on supply chain and distribution facilities. However, the cash outflow would have a negative impact on profitability in the near future.

From Dollar Tree’s Q1 2022 earnings conference call:

“April, which benefited from the later Easter holiday this year, was the strongest month in terms of both sales and traffic. Importantly, we successfully completed the conversion to a primary price point of $1.25 across the chain. Credit to our teams. This project was announced in September of 2021 and was completed by the end of February with minimal disruption. By the end of Q1, our customers have already seen more than 960 of our projected 2,000 new greater value product SKUs on the shelves.”

Bullish Outlook

The management raised its full-year revenue guidance last week, anticipating strong comparable sales in the coming quarters. Bringing respite to the depressed retail sector – after the weak earning performance by key players – Dollar Tree reported a 48% surge in first-quarter profit to $2.37 per share. It is mainly attributable to a 14% growth in comparable-store sales at the core Dollar Tree segment, which was partially offset by weakness in the Family Dollar division. Net sales rose 7% annually to $6.9 billion.

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Dollar General: A look at the discount retailer’s expectations for the fiscal year

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Dollar Tree’s stock grew a whopping 30% in the past ten days alone, marking one of the biggest short-term gains in history. It has moved close to the all-time highs seen a month ago. However, the shares traded lower on Tuesday afternoon.