Dollar Tree stock rises as discount retailer reports 11% earnings gain

Key points

• Dollar Tree stock jumped in early trading on solid Q3 earnings.

• Dollar Tree has been one of the worst performers on the S&P 500 this year.

• The company is in the middle of leadership and strategic changes.

Dollar Tree has been one of the worst performing stocks on the S&P 500 this year. Is it due for a turnaround?

Dollar Tree (NASDAQ: DLTR) saw its stock price grow about 2% in early trading Wednesday after the discount retailer reported solid third quarter earnings.

Dollar Tree has been one of the worst performing stocks on the S&P 500 this year, as its stock price is down about 47% year-to-date, trading at around $74 per share.

Should investors be looking to buy on the dip, particularly on its strong third quarter results and improved Q4 outlook?

Exploring options for family Dollar

Dollar Tree grew its net sales in Q3 by 3.5% year-over-year to $7.6 billion. That was better than analysts’ projections of $7.5 billion in net sales.

Operating earnings jumped 11% to $333 million, or $1.08 per share, in the quarter. Adjusted earnings, which analysts track, were up 15.5% to $1.12 per share, on adjusted operating earnings of $343 million. This topped consensus estimates of adjusted earnings of $1.07 per share.

This is a significant improvement on its second quarter results, which saw operating earnings plunge 29% year-over-year to $203 million and EPS fall 32% to 62 cents per share.

“Our Dollar Tree and Family Dollar merchandising efforts produced tangible results, and our third quarter sales came in at the high-end of our expected range,” Mike Creedon, interim CEO, said. “As an organization, our top priorities remain accelerating the growth of the Dollar Tree segment, completing the Family Dollar strategic review process, and unlocking value for Dollar Tree shareholders.”

In the quarter, Dollar Tree same store sales grew 1.8% while Family Dollar same store sales rose 1.9%. Also, the company opened 249 new Dollar Tree stores and 6 new Family Dollar stores. That brings the total number of stores to 16,590, with 8,868 Dollar Trees and 7,722 family Dollars.

The company has been undergoing a strategic shift, streamlining its underperforming Family Dollar stores. In Q3, the company closed 30 Family Dollars and through the first three quarters the company has shuttered 630 Family Dollar stores. This has resulted in some $26 million in closure-related costs.

Last quarter, the company said it was exploring strategic alternatives for the Family Dollar segment. This could include selling the Family Dollar business or spinning it off. 

Changes afoot

Another part of the turnaround plan involves Dollar Tree’s multi-price strategy. This involves adding additional price points for items, up to $7, while keeping the low rate of $1 to $1.50 that customers are accustomed to. Already the strategy has been rolled out in about 2,300 Dollar Tree stores.

This all comes during a period of instability at the top of the organization after CEO Rick Dreiling resigned on November 3 citing health challenges. Creedon has taken over on an interim basis while the board conducts a search, looking at both internal and external candidates.

In the Q3 earnings release, Dollar Tree announced another departure, as CFO Jeff Davis is leaving the company. An external search for a new CFO is underway.

The good news amid these changes is that the company raised its guidance for fiscal 2024. Revenue was bumped up to a range of $30.7 billion to $30.9 billion, up on the low end from $30.6B to $30.9B. Adjusted EPS was raised on the low end of the range to $5.31 to $5.51 per share, up from $5.20 to $5.60 per share previously.

Q4 net sales are targeted to range from $8.1 billion to $8.3 billion, while adjusted EPS is estimated to be in the range of $2.10 to $2.30.

Time to buy?

Analysts are mostly mixed on Dollar Tree, as it has a median price target of $79 per share, which would be about a 9% increase.

But there are a lot of moving pieces right now, with organizational changes and potentially a new CEO, as well as strategic shifts. Dollar Tree could be well-positioned to better compete in the deep discount space after these changes, but it all depends on execution.

Right now, it’s probably smart to wait for more visibility on where these changes will lead.