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What Do Dollar Tree’s Newly Added Risk Factors Tell Investors?

Virginia-based Dollar Tree (DLTR) is an American operator of discount variety stores. It operates a chain of nearly 16,000 stores under brands like Dollar Tree, Family Dollar, and Dollar Tree Canada.

For decades, the retailer has focused on selling an assortment of items that cost $1 or less. But it is making the transition to the $1.25 price point in a bid to offer shoppers a broader variety and boost its margins. It has tested the higher price point at a number of stores and got positive feedback from customers. Therefore, Dollar Tree is gearing up to shift to the new price across its network of stores.

With this in mind, let us take a look at the company’s latest financial performance and understand its the newly added risks. (See Top Smart Score Stocks on TipRanks)

Q3 Financial Results

Dollar Tree reported a 3.9% year-over-year increase in revenue to $6.42 billion for the third quarter 2021. Meanwhile, it posted earnings of $0.96 per share. The retailer ended the quarter with $701 million in cash and $3.25 billion debt. (See Dollar Tree stock charts on TipRanks).

Risk Factors

According to the new TipRanks’ Risk Factors tool, Dollar Tree’s main risk categories are Finance and Corporate and Production, which account for 26 each of the total 31 risks identified for the stock. The company has recently updated its profile with eight new risks under various risk categories.

Under the Finance and Corporate risk factor, the company tells investors that its distribution network is difficult to operate efficiently. It cites the challenge of attracting and retaining a reliable and adequate workforce. The company has resorted to using inducements such as wage increases and sign-on bonus in some markets to address the labor shortage at its distribution centers. However, such measures are increasing its costs and may adversely impact its profitability. Further, there is no guarantee that such measures will be enough to maintain the level of workforce required to run the distribution centers efficiently.

Under the Production risk category, the company highlights that labor disagreements resulting in strikes may delay the delivery of goods to its distribution centers and stores. It also says that its shipping and trucking costs have been increasing. The company says that it has been resorted to using the expensive spot market for ocean shipments as a result of its contracted carriers being unable to meet all of its shipping needs. In trucking, Dollar Tree says it is experiencing a shortage of truck drivers and an increase in diesel costs.

Under the Macro and Political risk category, Dollar Tree cautions about the potential adverse impact of climate change on its business. The company says that extreme weather events and natural disasters could disrupt the supply chain, result in product shortages in stores, and increase operating costs.

The Finance and Corporate risk factors’ sector average is at 34%, compared to Dollar Tree’s 26%. Shares of the company have increased 36% year-to-date.

Wall Street’s Take

Following Dollar Tree’s third quarter earnings report, Gordon Haskett Capital analyst Charles Grom upgraded the stock to Buy with a price target of $170. Grom’s price target suggests 15.95% upside potential.

The analyst noted that the shift to the $1.25 price point, which will roll out to all Dollar Tree stores by the end of the first quarter of 2022, increases the retailer’s chances of success.

Consensus among analysts is a Moderate Buy based on 8 Buys, 8 Holds and 1 Sell. The average Dollar Tree price target of $151.75 implies 3.51% upside potential to current levels.

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