Time To Buy This Dollar Stock?

Persistent inflation and elevated interest rates have created an economic cocktail that has been hard for consumers to swallow. For retailers though, who can pass along higher prices, spikes in revenues and profits offer opportunities for shareholders.

Unfortunately, that hasn’t been the case so far for Dollar Tree (NASDAQ: DLTR) with stock is down by over 5% in the past year.

After trading nearly even through the first half of 2023, DLTR took a steep drop in September on news of widespread shoplifting in addition to economic woes.

Though Dollar Tree stock bounced back at the end of the year, it’s not out of the woods yet. The company released its 3rd quarter results in November, and while there were some positive signs, the release didn’t wow investors either.

Now trading around 15% lower than the 52-week high of $161.10, Dollar Tree might appeal to investors looking for a bargain. So is Dollar Tree stock a buy?

Why Did Dollar Tree Stock Drop?

Dollar Tree had a a tough 2nd quarter and the most concerning point was Dollar Tree’s deteriorating margins. The company reported a drop in gross profit margin from 32.7% the year before to 29.8%. Theft was cited as a main cause for the drop, and it was worse than Dollar Tree anticipated.

Worse, there doesn’t appear to be any immediate solution. With that said, short-term patches like putting more products behind the counter and locking up cases may help to deter some cases. Dollar Tree leadership even hinted they may stop carrying certain products entirely if they are frequently shoplifted.

While that may minimize shrink, it might also drive customers away if products aren’t easy to purchase or even available to buy. Another concerning trend is that lower-income shoppers aren’t frequenting the store as much as they had in the past.

Dollar Tree reported that most of the customers gained in the 3rd quarter are from households that earn over $125,000 per year. While it is a positive that the company is expanding its customer base, it could be a double-edged sword. If economic conditions improve, Dollar Tree’s newfound clientele could evaporate.

Will Dollar Tree Stock Go Back Up?

In spite of those concerns, Dollar Tree shares bounced back in late 2023 on a better report from the 3rd quarter. Same store net sales increased 3.9% overall, mostly driven by the Dollar Tree brand (the company also includes the Family Dollar chain of stores).

The Dollar Tree brand increased its comparable transaction count by 7% during the quarter. That’s a measure used to nail down an accurate valuation for the company. While revenue increased 5.4% year-over-year to $7.31 billion in the quarter, it was still about 1.5% less than analysts expected.

Net income, on the other hand, took a 20% plus drop to $212 million in the quarter. That left diluted earnings per share at $0.97, which was 3.77% less than expected. Lagging sales caused the company to lower its guidance from the initial range of $30.6 to $30.9 billion to $30.5 to $30.7 billion for the fiscal year.

Dollar Tree hopes to drive revenue through a number of initiatives, including the opening of nearly 200 stores in the quarter. It also added $3-$5 refrigerated and frozen items in 920 Dollar Tree stores.

In 2019, the company rolled out Dollar Tree Plus. It includes a variety of items in that same $3-$5 range that are placed apart inside the company’s stores. In the 3rd quarter, the retailer expanded its Plus offering to include 870 more stores.

What Do Analysts Say About Dollar Tree Stock?

Wall Street still believes that Dollar Tree’s potential outweighs the company’s current headwinds. Out of 29 analysts who’ve rated DLTR, 16 consider that the stock is a Buy at this price point.

The current consensus is that Dollar Tree shares are due for a 14.1% increase over 2024, and it will reach as high as $155.50 per share.

On the high side, two of those analysts believe the stock will outperform the market and could go up to $195 per share over the coming year, representing a 43.1% increase.

On the low side, there are two analysts who rate DLTR as an underperformer with the lowest assessment forecasting a 23% decline to $105 per share.

Is Dollar Tree Stock Undervalued?

According to 23 analysts, Dollar Tree stock is 8.3% undervalued with a price target of $147 per share.

Given where the stock traded earlier this year its a reasonable expectation that the stock could bounce higher, so long as revenue growth stays on course. It’s worthwhile to note that DLTR is trading at 26x earnings now. That’s a concern, especially when Dollar General, the company’s main competitor, is currently trading at a price-to-earnings value of just 15.6x. DG also pays a dividend, which Dollar Tree does not currently pay.

That means any gains for DLTR will be driven by improving sales and margins. While Dollar Tree is doing its best to make that happen, including a major revamp of its operations, there is no guarantee that it will be enough to boost the company’s share price in the short term.

Is Dollar Tree Stock a Buy or Sell?

Long term, the story may be different but its not clear how patient investors will have to be. It’s concerning that Dollar Tree is struggling in hard economic times, which is precisely when many would expect discount retailers to thrive.

Shoplifting is another issue that bears monitoring, and whether Dollar Tree’s increased security measures have an impact on sales. It also bears watching whether the company’s more affluent new customers will stay with the store if the economy improves.

Still, Dollar Tree has managed to stay afloat in a difficult situation. If the company’s higher-priced product lines can deliver and it can streamline operations, Dollar Tree could be back on the rise in 2024.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.