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Dollar Tree (DLTR) Forays into Green Zone: Will it Sustain?

Tables seem to be turning for Dollar Tree, Inc. DLTR which was in the red zone for quite some time, as reflected by its stock price history in the last six months. However, this Zacks Rank #3 (Hold) stock jumped 4.1% in the last one month, outperforming the Zacks categorized Retail – Discount & Variety industry’s dip of 0.4%. Is the stock up for a revival? Let’s find out.

Dollar Tree mainly gained momentum from its solid fourth-quarter fiscal 2016 results delivered on Mar 1, which marked its second consecutive earnings beat. Other than this, the company’s solid long-term growth strategies, constant store expansions and prospects from Family Dollar’s buyout have been the significant growth drivers.

Taking a look at Dollar Tree’s fourth quarter, we note that both top and bottom line surged year over year. While greater traffic helped the company to post its 36th straight quarter of comps growth, reduced costs fueled gross margin expansion. This in turn boosted results. Further, the fiscal 2016 performance remained solid, as the company crossed $20 billion in sales, alongside generating record earnings.

These results received considerable contribution from Family Dollar, which was acquired by Dollar Tree last year. The company is on track to integrate Family Dollar’s operations into its business, which if completed, is likely to help Dollar Tree emerge as a mega U.S. discount retailer that can single handedly counter competition. Further, the company will be well positioned to reach out to more value-seeking consumers, offering wider assortments at better prices. Also, it will be in a better position to negotiate with suppliers which is expected to enhance its purchasing power.

We also commend Dollar Tree’s long-term growth strategy, which include store expansion strategies, enhancement of store productivity, creating new store formats, tapping of new markets and incorporating innovative sales channels to serve its patrons better. Also, in order to improve the operating margin, Dollar Tree is focusing on imported goods, supply chain efficiency and aggressive cost cuts.

However, Dollar Tree’s global presence keeps it prone to foreign currency headwinds, as was witnessed in the fourth quarter. Further, the company operates in the highly competitive discount retail merchandise sector, which may weigh upon its results. While Dollar Tree remains on track with Family Dollar’s integration, cannibalization is expected to hurt comps throughout the re-banner process. Nonetheless, synergies generated from this acquisition are likely to be beneficial in the long run. Strategic investments in technological advancements also bode well.

While the aforementioned obstacles and a tough retail landscape were weighing on Dollar Tree’s stock price for a while, we believe that its robust growth strategies are finally paying off. So, let’s wait and see if this discount-retail chain can sustain this revival.

Stocks to Consider

Until then, investors can safely count on better-ranked retail stocks like Burlington Stores, Inc. BURL, Big 5 Sporting Goods Corporation BGFV and The Children’s Place, Inc. PLCE, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Burlington has a long-term growth rate of 15.9%. Also, the company has a superb earnings surprise history.

Big 5 Sporting, with long-term earnings per share growth rate of 12%, has delivered positive earnings surprise in the last three quarters.

Children's Place has an average positive earnings surprise of 39% in the trailing four quarters. The stock has a long-term growth rate of 8%.

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