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Why Did Shares of Dollar Tree Gain 22%?

Story Highlights

Dollar Tree reported stronger-than-expected Q1 results, topping both earnings and revenue estimates, driven by robust sales and margin expansion. The retail giant also raised its FY2022 guidance well above analyst expectations.

Dollar Tree (NASDAQ: DLTR) shares surged 21.9% on May 26, after the discount retailer delivered a blowout first-quarter results and also raised its FY2022 guidance well above analysts’ expectations.

The U.S.-based discount variety retail store operator that sells items for $1 or less, saw robust sales and margin expansion following the nationwide rollout of the higher base price point of $1.25, which drove the upbeat results.

Q1 Beat

The company reported stellar quarterly earnings of $2.37 per share, significantly higher than analysts’ estimates of $2.01 per share and much higher than the earnings of $1.60 per share reported for the prior-year period.

Additionally, net sales climbed 6.5% to $6.9 billion compared to the prior-year period and outpaced the Street’s estimate of $6.76 billion.

The revenue growth is attributed to enterprise comparable sales growth of 4.4%. Comparable store sales for Dollar Tree increased 11.2%, offsetting Family Dollar same-store sales that decreased 2.8%.

Similarly, gross margin improved 360 bps year-over-year to 33.9% driven by improved initial mark-on, favourable product mix in the Dollar Tree segment, and leverage on distribution and occupancy costs, offsetting higher freight costs, unfavorable product mix in the Family Dollar segment, and markdowns.

Raised FY2022 Outlook

Based on robust Q1 results, management raised financial guidance for FY2022.

The company now forecasts adjusted earnings in the range of $7.80 per share to $8.20 per share, which is higher than the prior guided range of $7.60 to $7.80 and the consensus estimate of $7.88 per share.

Furthermore, revenues are forecast to be in the range of $27.76 billion to $28.14 billion, which is higher than the previous guidance of $27.22 billion to $27.85 billion and the consensus estimate of $27.89 billion.

For the fiscal second quarter, adjusted earnings are likely to range between $1.45 per share and $1.55 per share, while the consensus estimate is pegged at $1.70 per share. Revenues are projected to be in the range of $6.65 billion to $6.78 billion, versus the consensus estimate of $6.75 billion.

CEO’s Comments

Sharing his views on the success of the initiatives, Dollar Tree CEO, Michael Witynski, commented, “We believe now is the ideal time to accelerate investments focused on driving growth through improved associate and shopper experience, while propelling greater efficiencies.”

He further added, “We anticipate these multi-year investments will be focused around our associates, our distribution network and supply chain, our pricing and value proposition, and our technology.”

Wall Street’s Take

Following the upbeat results, Telsey analyst Joseph Feldman increased the price target on Dollar Tree to $185 from $160 and reiterated a Buy rating.

Feldman remains affirmative on the stock based on early success from its initiatives that present a “multi-year opportunity to structurally improve the profit profile of the business.”

He further highlighted, “Dollar Tree also continues to make progress on other transformative initiatives—the rollout of Dollar Tree Plus! multi-price point assortment ($3 and $5 items), Family Dollar H2 remodels, and ongoing expansion of Dollar Tree-Family Dollar combo stores.”

Overall, the stock has a Strong Buy consensus rating based on 12 Buys and two Holds. The average Dollar Tree price target of $171.78 implies 5.5% upside potential from current levels.

Key Take-Away

Notably, DLTY shares have gained over 62% over the past year, massively outperforming the benchmark indices.

Most importantly, the company has several key transformational strategies and investments in place to accelerate its growth and profitability for years to come.

Given the transformative initiatives, new product launches, convenient locations, value merchandise, and strong management confidence reflected in its robust outlook, the company remains well-positioned to gain market share and increase its profitability in the long run.

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