Dollar Tree Stock: Investors May Be Barking Up the Wrong Tree

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Value-conscious investors, much like value-conscious shoppers, want to stretch their dollars as much as possible. Dollar Tree (NASDAQ:DLTR) may have bargains galore in its stores, but DLTR stock isn’t necessarily the perfect pick for value and growth.

It might seem self-evident that Dollar Tree should thrive when product prices at many big-box retail chains are on the rise. Indeed, as the company’s name implies, Dollar Tree ought to be a haven for affordably priced goods.

Maybe there are bargains to be found in Dollar Tree and at its associated Family Dollar locations, but the company still faces stiff competition from Walmart (NYSE:WMT) and from Temu, an increasingly popular Chinese e-commerce platform. Granted, Dollar Tree is succeeding in some respects, but when it comes to DLTR stock, the phrase “buyer beware” applies in 2024.

Dollar Tree is changing and stores are closing

To its credit, Dollar Tree resisted inflationary pressures and sold all items for $1 or $1.25 for a surprisingly long time. However, it appears that even Dollar Tree had to succumb to price pressures sooner or later.

Unfortunately, food-price inflation hits struggling Americans directly in their pocketbooks, and it’s forcing Dollar Tree to sell food items for much more than $1. As evidence of this, Dollar Tree is now selling $3, $4 and $5 frozen and refrigerated food items at more than 6,500 locations.

This isn’t only happening in the food section. According to the company’s latest quarterly report, Dollar Tree currently sells $3 and $5 center-store merchandise at around 5,000 stores. This might prompt some bargain hunters to turn to Walmart or even Temu for better deals on certain items.

It remains to be seen whether Dollar Tree will succeed in selling many of its more-than-$1 items this year. For the time being, it looks like the company isn’t doing too badly, as it opened 219 new stores in its fiscal fourth quarter; with that, the company’s total full-year new-store openings increased to 641.

On the other hand, Dollar Tree’s “portfolio optimization review” resulted in plans to close approximately 600 Family Dollar stores in the first half of fiscal 2024. In addition, Dollar Tree expects to shutter about 370 other stores (not necessarily of the Family Dollar brand) as their leases expire.

Dollar Tree Chairman and CEO Rick Dreiling proclaimed that his company is “accelerating our multi-price rollout at Dollar Tree and taking decisive action to improve profitability and unlock value at Family Dollar.” Again, that “multi-price rollout” appears to mean more-than-$1 product prices in response to inflation pressures.

As for the “decisive action,” I suspect that Dreiling is referring to the aforementioned Family Dollar store closures. Of course, I don’t have an insider’s view of what’s going on at Dollar Tree and Family Dollar. Generally speaking though, large-scale store closures aren’t a sign of success and confidence in a brand.

Earnings miss detracts from Dollar Tree’s value proposition

Prior to Dollar Tree’s fourth-quarter fiscal 2023 financial report, which was released this morning, the company’s GAAP trailing 12-month price-to-earnings (P/E) ratio was 28.36x. For comparison, the sector median P/E ratio was 20.67x.

Thus, judging by that metric, Dollar Tree didn’t have a bargain-level valuation. However, DLTR stock is down sharply today, so the company’s valuation might improve somewhat during the next few trading sessions.

Nonetheless, even if Dollar Tree’s valuation multiple comes down, the bull case isn’t very compelling. Whereas analysts expected the retailer to have generated revenue of $8.67 billion during Q4 of FY2023, it fell short with revenue of $8.63 billion. Furthermore, Dollar Tree’s quarterly adjusted earnings of $2.55 per share missed Wall Street’s call for earnings of $2.66 per share.

The near-term future isn’t particularly bright either, as Dollar Tree expects to generate current-quarter earnings of $1.33 to $1.48 share. That’s a pessimistic outlook when compared to the analysts’ consensus estimate of $1.70 per share.

Short-term stock traders don’t like it when companies release lower-than-anticipated forward guidance, so they’re punishing Dollar Tree today by dumping its shares. If the stock price drops low enough, maybe there will be an irresistible bargain. In my estimation, $110 would be a good price for DLTR stock, although $100 would be even better.

However, even at those prices, Dollar Tree shares might not be worth buying. The most sensible strategy would be to wait another quarter to see if Dollar Tree and Family Dollar expect to close more stores and continue focusing on higher-than-$1 items. If so, then it’s probably not a great idea to invest one’s dollars in Dollar Tree.