Categories Analysis, Retail

Will new product mix and store format help Dollar Tree stay in growth mode?

As part of the growth initiatives, the management plans to expand the Dollar Tree Plus offering to about 500 stores this year

Dollar Tree, Inc. (NASDAQ: DLTR) seems to be emerging from a difficult phase marked by stiff competition and elevated costs. With the virus-driven retail boom lifting the demand for its low-priced consumer goods, the discount store chain is transforming itself by tweaking the store format and reorganizing the business.

Bullish View

When the Virginia-based retailer reports fourth-quarter results on March 3 before the opening bell, the market will be looking for earnings of $2.11 per share on revenues of $6.78 billion, which represents an increase from last year’s levels. The bullish outlook aligns with the positive target price on the stock, indicating a 15% upside. Going by experts’ views, the stock could create decent shareholder value in the long-term, though the ongoing market volatility calls for caution.

In what could be a move to retain the current sales momentum beyond the COVID era, the management will be expanding the Dollar Tree Plus offering to about 500 stores this year. In the early part of the second half, the company opened 127 net new stores, encouraged by the steady uptick in sales. The other growth strategies include initiatives to create awareness and transition the business from consumer goods to higher-priced discretionary items.

Unique Model

Being a discount retailer, the company often beats operational headwinds by leveraging the flexibility offered by the combination of Dollar Tree and Family Dollar — its fixed-price and variable-price business segments respectively. Recent efforts to optimize the store network, as part of a portfolio restructuring program, paid off when market conditions turned hostile soon after the virus outbreak. Plans are afoot to renovate around 1,250 Family Dollar stores this year, after remodeling several stores to the H2 format.

Walmart sees fresh wave of panic buying as COVID curbs return

We are seeing greater sales of seasonal product as it hits our stores. Customers are buying ahead and not waiting until the last minute. This is resulting in better sell-through and reduced markdown exposure. We will continue to develop new strategic store formats, so we are able to better serve our customers while improving store productivity, margins, and returns. We want formats that utilize the best of both brands to serve customers in all types of geographic markets. This will be a story of evolution, change, and improvement.

Mike Witynski, chief executive officer of Dollar Tree

Q3 Numbers Beat

In the October-quarter, adjusted earnings advanced 29% from the year-ago period to $1.39 per share. Driving the bottom-line growth, total sales rose by 7% to $6.2 billion, reflecting strong comparable sales that grew at the fastest pace in more than two years. Margins got a boost from bigger prices and improved cost structure, which were partially offset by higher distribution costs including COVID-related payroll costs.

Read manage met/analysts’ comments on Dollar Tree’s Q3 results

Shares of the company this week traded close to the record highs seen more than a year ago, continuing the recovery from last year’s COVID-induced slump. They have gained about 7% in the past six months and traded slightly above $107 on Tuesday. However, the stock lost some momentum last week and underperformed the market since then.

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