4 Reasons Why Dollar Tree (DLTR) is an Investor Favorite

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Dollar Tree, Inc . DLTR has been benefiting from its impressive comps performance for a long time. Comps remained robust mainly owing to competitive pricing and its strategic store expansion plans, including remodeling and relocations. Additionally, favorable margin trends have been aiding the company's bottom-line performance. Dollar Tree is also poised to gain from the integration of Family Dollar.

Let's analyze the factors driving the company performance.

Robust Comps Growth

Dollar Tree has maintained an impressive comps performance for the past several quarters. Evidently, it has delivered comps growth for the 39th straight quarter. In the third quarter fiscal 2017, the company witnessed consolidated comps growth of 3.2% and 3.3% in constant currency. This solid comps growth can be attributed to improved customer count and average ticket. While Dollar Tree banner posted comps growth of 5% (in constant-currency), the same at the Family Dollar banner climbed 1.5%. For fourth-quarter and fiscal 2017, the company anticipates comps growth in a low-single digit range.

Of late, the retail sector on the whole has witnessed favorable comps trend, particularly in the holiday season and in January 2018. The companies note that the robust consumer spending and other economic factors that aided performance in the holiday season have continued into 2018 as well. Notably, some other players that witnessed favorable comps growth in January are Zumiez, Inc. ZUMZ , Costco Wholesale Corporation COST and L Brands Inc. LB , which recorded comps growth of 6.3%, 6% and 7%, respectively.

Robust Surprise Trend & Solid Outlook

Dollar Tree has witnessed a spectacular surprise trend recently, with second straight earnings and sales beat in third-quarter fiscal 2017. The company's results gained from strong comps and improved margins. In third-quarter fiscal 2017, gross margin expanded 90 basis points on reduced merchandise costs, lower markdowns and occupancy expenses, as a percentage of sales. Further, positive impact from Canadian currency fluctuations aided results.

Driven by the solid quarterly results and progress on Family Dollar integration, the company raised guidance for fiscal 2017 and provided a solid view for the fourth quarter. The company anticipates comps growth in a low-single digit range for the fourth quarter and fiscal 2017. Further, Dollar Tree anticipates the additional 53rd week to increase sales by $400-$430 million and earnings by 19-22 cents per share.

Family Dollar Integration Augur Well

Dollar Tree is befitting from the ongoing integration of Family Dollar that was acquired in July 2015. In the third quarter, sales from the Family Dollar banner notably represented nearly 50% of the company's consolidated sales. Additionally, the company is undertaking significant store renovation initiatives for Family Dollar to attract more customers. Evidently, the company renovated 191 Family Dollar stores in the third quarter and intends to complete 350 renovations in fiscal 2017.

Also, the company is on track with the Family Dollar integration and re-banner process, which is likely to generate run rate savings of about $300 million in three years. The combined chain, on the completion of the integration, will be positioned to reach out to more value-seeking consumers through a network spanning across vast geographies.

Store Expansion Plans

Dollar Tree is concentrating on expanding its store base and incorporating technological advancements. Moreover, the company leverages an extensive network of stores to effectively penetrate targeted markets. Notably, Dollar Tree opened 169 new stores and expanded or relocated 23 stores during the third quarter. Meanwhile, the company remains on track to operate over 10,000 Dollar Tree and over 15,000 Family Dollar outlets across the United States.

Bottom Line

While all is well with Dollar Tree, volatile consumer behavior remains a concern. Also, significant global exposure may pose threats. However, the company's solid comps growth, expansion of stores, improved margins and solid acquisitions paves the path for long-term growth.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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