A poor performer in 2024 to date, Dollar Tree (NASDAQ:DLTR) stock needs to choose a direction — preferably, to the upside. Nevertheless, an imminent rally is unlikely in light of the retailer’s financial results and major announcement.
Despite the fact that Dollar Tree sells discounted products, it doesn’t mean DLTR stock is a bargain. Keep in mind that Dollar Tree also owns the Family Dollar brand, which has weighed on the corporate’s top and bottom lines for years.
For what it’s price, Dollar Tree stays profitable despite Family Dollar’s lackluster performance. During a time of sticky inflation and economic uncertainty, Dollar Tree should proceed to generate decent revenue from low-priced goods.
Nevertheless, whether the corporate can engineer a turnaround and produce more investors into the fold is one other story.
Giving up on a foul investment
“Dollar Tree has been on a multi-year journey to assist the Company fully achieve its potential,” declared Chief Executive Rick Dreiling within the recent corporate announcement.
Apparently, that “journey” may include effectively giving up on the Family Dollar brand.
As a proud cheapskate myself, I can attest that there’s an enormous difference between Dollar Tree and Family Dollar stores. No matter what city I’m in, once I see one among those green Dollar Tree store signs, I do know exactly what I’ll see inside: a big selection of products, each costing $1.25 plus tax.
It’s a unique story entirely with Family Dollar, where the product prices vary, and unless there’s an emergency, I’ll keep driving until I discover a Dollar Tree store. I think that a few of my fellow bargain hunters do the identical thing.
Just as I’ve given up on Family Dollar as a reduction shopper, Dollar Tree may find yourself abandoning the brand within the near future. Dollar Tree paid a hefty $8.9 billion for Family Dollar, but last yr, it announced plans to shut about 970 Family Dollar stores.
Dreiling attempted to spin this as a positive development, claiming that Dollar Tree is shuttering all of those Family Dollar stores to “give attention to enhanced investments in remaining Family Dollar stores that present favorable opportunities for long-term growth and transformation, with more attractive returns on capital.”
That sounds great, but as at all times, investors should watch what the corporate does fairly than what management says.
The corporate just disclosed that it has “initiated a proper review of strategic alternatives” for Family Dollar. This “could include, amongst others, a possible sale, spin-off or other disposition of the business.”
Thus, the CEO’s positive spin doesn’t pass the commonsense test. If Dollar Tree really saw “favorable opportunities for long-term growth and transformation” and “more attractive returns on capital” with the Family Dollar brand, then it wouldn’t consider divesting all of those Family Dollar stores.
Thus, at the least to me, it just feels like Dollar Tree is giving up on a foul investment.
Dollar Tree’s uninspiring quarter
In other news, Dollar Tree just released its results for the primary quarter of its fiscal 2024, which ended on May 4. Floundering DLTR stock really needed a positive catalyst, but there wasn’t much to get enthusiastic about in those quarterly results.
To recap, the corporate’s net sales increased 4.2% yr over yr to $7.63 billion, which was according to Wall Street’s consensus estimate. Meanwhile, Family Dollar’s same-store net sales only grew 0.1% yr over yr.
On the underside line, Dollar Tree reported adjusted earnings of $1.43 per share, down 2.7% yr over yr. Like Dollar Tree’s first-quarter revenue, this result was according to the analysts’ consensus forecast.
This may be a very good time to conduct a price check using the nice, old price-to-earnings (P/E) ratio as a valuation gauge.
I calculated that Dollar Tree’s EPS for the past 4 quarters was 91 cents + 97 cents + $2.55 + $1.43, or a complete of $5.86. If the DLTR share price is around $120, then the retailer’s trailing 12-month P/E ratio could be $120/$5.86, or around 20.5.
Which may sound like a low valuation, however the sector median P/E ratio is 17.64. Due to this fact, Dollar Tree stock isn’t necessarily a compelling bargain based on that old-school metric.
Furthermore, as the corporate releases ho-hum quarterly results and seems able to completely surrender on Family Dollar, there’s just no clear incentive to open a share position in Dollar Tree.