Morningstar | Despite Soft 3Q Sales, Accelerated Family Dollar Renovations Should Benefit Dollar Tree
We do not anticipate making a large change to our $89 fair value estimate for no-moat Dollar Tree after it reported third-quarter earnings, as our plans to temper our short-term outlook should offset a time value of money adjustment. Our long-term view, calling for low- to mid-single-digit annual top-line expansion against high-single-digit adjusted operating margins over the next decade, is intact.The Dollar Tree and Family Dollar banners saw same-store sales rise 2.3% and fall 0.4%, respectively, trailing our corresponding 3.5% and 0.5% growth expectations. The firm adjusted its sales and EPS guidance, now calling for $22.72 billion to $22.83 billion and $4.86-$4.95, respectively (versus its earlier $22.75 billion to $22.97 billion and $4.85-$5.05 indications and our $22.9 billion and $4.96 pre-announcement targets).
The firm announced plans to accelerate its renovation efforts at its struggling Family Dollar unit (about half of overall sales), targeting 1,000 renovations in fiscal 2019, compared with the roughly 865 stores it has revitalized since the acquisition closed in 2015. We are encouraged by the results such efforts have delivered; at a relatively modest cost (about $125,000), refurbished units are delivering mid- to high-single-digit comparable-store sales relative to the chain's 0.4% year-to-date slide. Moreover, management said that the most recently renovated locations are delivering even better performance. This boosts our confidence that the firm can build Family Dollar to mid-single-digit growth with around 120 basis points of adjusted operating margin expansion (to 6%) over our 10-year explicit forecast.
Management said it will continue to adjust sourcing and product attributes (such as count size) in response to upcoming tariffs, with around 80% and 50% of the impact at Dollar Tree and Family Dollar, respectively, already mitigated (assuming a 25% mark). We still expect the firm will be able to modify its assortment to protect margins.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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