Morningstar | As Family Dollar Rebounds, Dollar Tree Should Deliver Improving Results; Shares Somewhat Rich
We do not plan a large change for our $89 per share valuation for no-moat Dollar Tree after it announced a solid start to fiscal 2019 and still expect mid-single-digit yearly top-line expansion against high-single-digit adjusted operating margins over the next decade. With the shares trading higher than our valuation, we suggest investors await a more attractive entry point.Dollar Tree saw sales rise by 5% on 2.5% and 1.9% comparable sales growth for the namesake and Family Dollar banners, respectively (versus our 3% and 1.5% estimates for each chain). Management updated its full-year guidance, now calling for $5.23 to $5.53 (adjusted for discrete costs) versus its prior $5.16 to $5.56 range; our pre-announcement estimate was $5.44.
We are encouraged that Dollar Tree has mitigated most tariff-related cost increases to date, though extension of the 25% mark to a greater set of products (which is not contemplated in management’s guidance) could prove more difficult to alleviate and lead us to temper our outlook. While Dollar Tree (which we believe is more exposed considering Family Dollar’s consumables-oriented bent) has a flexible assortment that we believe can adapt to alternative product sources, it would likely need time to develop vendor relationships to reduce its exposure to China.
The improved comparable sales result at Family Dollar (sequentially higher than the 1.4% growth and 0.4% dip it saw in the fourth and third quarters of fiscal 2018, respectively) reinforces our view that the chain can deliver improved performance once its stores and assortment are optimized. While segment margins (which fell around 200 basis points to 3.2%, though the mark beat our 2.3% target) should take time to expand as investment needs abate and operating leverage is restored, we see a 4% long-term mark. Still, our forecast lags the roughly 7% mark Family Dollar posted in 2011, as we expect the competitive environment to remain relentless and force price concessions.
Dollar Tree is an operator of discount variety stores. The company's stores operate under the names of Dollar Tree, Family Dollar and Dollar Tree Canada. The company's segments are: Dollar Tree, which is the operator of discount variety stores providing merchandise at the fixed price point of $1.00; and Family Dollar, which operates general merchandise discount retail stores. The merchandise mix in the company's Dollar Tree stores consists of consumable merchandise, variety merchandise, and seasonal goods. The merchandise mix in the company's Family Dollar stores consists of consumable merchandise, home products, apparel and accessories merchandise, and seasonal and electronics merchandise.
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