Dollar Tree (DLTR) Poised For Growth: Stick To The Stock

Discount store operator, Dollar Tree Inc. (NASDAQ:DLTR) seems to be well positioned to leave a mark in the retail sector backed by its growth initiatives, which include store expansion, enhancement of store productivity, creating new store formats, tapping of new markets and incorporating innovative sales channels. Shares of this Chesapeake, VA-based company have surged 3.6% on a year-to-date basis and 16.5% in the past one year.

Dollar Tree is concentrating on expanding its store base and incorporating technological advancements. It leverages an extensive network of stores to effectively penetrate its targeted markets. This, in turn, enables it to generate healthy sales and gain market share. Further, we remain confident that the company will continue to implement strategies such as increasing consumables mix, rolling out freezers/coolers at stores along with multi-price point expansion to boost top-line performance.

During second-quarter fiscal 2016, the company opened 156 new stores and expanded or relocated 52 stores. Additionally, the company re-bannered 47 Family Dollar outlets and converted the remaining 32 Deals stores to Dollar Tree outlets. This marked the completion of the re-bannering of Deals stores.

Further, the company remains on track with the integration of Family Dollar that was acquired in Jul 2015. As part of its re-banner efforts, the company opened 47 old Family Dollar outlets as Dollar Tree outlets in second-quarter fiscal 2016. While increased costs and cannibalization during the integration and re-bannering process are anticipated to weigh on the company’s results for some time, it expects to generate annual run rate synergies worth at least $300 million by the end of the third year of this acquisition.

Moreover, the company’s sales and earnings improved substantially on a year-over-year basis in the second quarter. Further, the company continued with its positive comparable sales (comps) trend in the quarter as consolidated comps grew 1.2% (on a constant currency basis). This marked Dollar Tree’s 34th straight quarter of comps growth. Moreover, the company anticipates comps to increase in a low single-digit range in fiscal 2016.

However, the company’s second-quarter results were affected by a challenging retail environment and persistent currency headwinds. This led both top and bottom lines to fall short of estimates in the second quarter. While the company lowered its sales outlook for fiscal 2016, elevated earnings projections for the fiscal bode well.

Nonetheless, Dollar Tree has been witnessing a downtrend in its earnings estimates over the past 30 days. The Zacks Consensus Estimate for fiscal 2016 has dipped 1.9% to $3.67 per share, while the estimate for fiscal 2017 is down 1.1% to $4.47 per share.

The stock currently carries a Zacks Rank #3 (Hold).

Stocks that Warrant a Look

Some better-ranked stocks in the retail sector include Burlington Stores Inc. (NYSE:BURL) , Big Lots Inc. (NYSE:BIG) and L Brands Inc. (NYSE:LB) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Burlington Stores has a positive record of earnings surprises in the trailing four quarters with an average beat of 16.1% and has seen positive estimate revisions in the in the last 30 days.

Big Lots has an average earnings beat of 8% in the last four quarters and estimates are witnessing an uptrend in the last 30 days.

L Brands has to its credit a favorable surprise trend with an average beat of 3.8% in the trailing four quarters and the estimates have been moving up in the last 60 days.

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