How Analysts Are Changing Tune on Dollar Stores

Dollar Tree posted $0.72 in EPS on $5.00 billion in revenue, compared to the consensus estimates of $0.73 in EPS on revenue of $5.09 billion. In the same period of last year, Dollar Tree posted EPS of $0.25 and revenue of $3.01 billion.

The $2 billion increase in revenue was the result of an incremental $1.8 billion in net sales from Family Dollar stores, sales from new Dollar Tree stores and a 1.2% same-store sales increase on a constant currency basis. Same-store sales increased 2.7%, on a constant currency basis, in the prior-year period. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 1.1% for the second quarter.

In terms of the outlook for the fiscal third quarter, the company expects to have EPS in the range of $0.76 to $0.82 and net sales in the range of $5.02 billion to $5.10 billion, based on a low single-digit increase in same-store sales. The consensus estimates are $0.76 in EPS on $5.13 billion in revenue.

Credit Suisse saw Dollar Tree’s earnings as disappointing as industry fundamentals appear to be deteriorating and there is still no real evidence of a turnaround at Family Dollar. The firm continued with its Underperform rating and $76 price target. Credit Suisse noted in its report:

Earnings were roughly in-line with expectations and at the high end of guidance, but comps fell short of at both Dollar Tree and Family Dollar. The calendar may have played some role, but there is also real evidence of slowing demand, intensifying competition, and an overall lack of any improvement in momentum at Family Dollar. While the segment’s EBIT contribution was about as we expected despite weak sales and management’s commentary on synergies remained good, a lack of improvement in sales at Family Dollar is concerning given that the gap to Dollar General is productivity-based. Visibility on a near-term improvement is low, especially with Dollar General and other staples players like Wal-Mart focused on lowering prices. We remain concerned about the market’s high expectations around this deal and cautious overall on the stock. Weakening industry trends now create further incremental risk.

Merrill Lynch again took the more positive view on the stock. The firm reiterated a Buy rating with a $105 price objective, as it continues to see Dollar Tree as one of the best multiyear growth stories. Merrill Lynch views the share price pressure today as an overreaction to a comp miss and concerns over competition and low end consumers.

Other analysts weighed in on Dollar Tree:

  • Feltl and Company Research has a Buy rating and raised its price target to $101.20 from $97.25.
  • JPMorgan cut its price target to $104 from $105.
  • UBS has a Buy rating and lowered its price target to $100 from $108.
  • S&P Global maintained a Sell rating with an $84 price target.

Shares of Dollar General closed trading at $75.50 on Friday. The stock has a consensus analyst price target of $97.14 and a 52-week trading range of $59.75 to $96.88.

Dollar Tree shares closed at $85.50, with a consensus price target of $97.86 and a 52-week range of $60.31 to $99.93.