Dollar Tree, Inc. (DLTR), which is headquartered in Chesapeake, Va., is a leading discount retailer operating in 48 states in the United States and Canada. It owns and operates more than 15,500 stores in the United States. Its subsidiary Family Dollar is one of the fastest-growing retailers in the country. The company has offered its products at $1 for 35 years.

However, on November 23, 2021, DLTR announced that it is raising prices by 25% to $1.25. Management has stated that the price increase will allow the company to materially expand its offerings by introducing new products and sizes. Also, DLTR is expected to reintroduce many customer favorites and key traffic-driving products that were previously discontinued due to its $1 pricing constraints. The price hike is expected to be implemented across more than 2,000 legacy Dollar Tree stores by next month and to all stores by the first quarter of 2022. Regarding this, DLTR President and CEO Michael Witynski said, “Lifting the one-dollar constraint represents a monumental step for our organization, and we are enthusiastic about the opportunity to meaningfully improve our shoppers’ experience and unlock value for our stakeholders.”

Shares of DLTR have declined 2.3% in price since the news release to close yesterday’s trading session at $141.35. While analysts expect the company’s revenues to improve, its EPS might fall amid continuing supply chain disruptions despite the price hike.

Here is what could shape DLTR’s performance in the near term:

Poor Quarterly Results

DLTR’s revenues increased 3.9% year-over-year to $6.42 billion for the 13 weeks ended October 31, 2021. However, its operating income fell 33.3% from the same period last year to $310.50 million. This can be attributed to a 9.4% rise in the cost of goods sold (COGS). Its net income and EPS slumped 34.3% and 30.9%, respectively, from the prior-year quarter to $216.80 million and $0.96 over this period.

Mixed Growth Prospects

Analysts expect DLTR’s revenues to rise 5% in the current quarter (ending January 2022), 3.2% in the current year, and 5.9% next year. However, the Street expects the company’s EPS to decline 17.4% in the current quarter and 1.4% in the current year.

Because supply chain disruptions are expected to be resolved over time because the shipping industry is working to increase its container fleet, DLTR’s EPS is expected to rise at a 14.9% CAGR over the next five years.

Premium Valuation

In terms of forward non-GAAP P/E, DLTR is trading at 25.44x, which is 72.1% higher than the 12.78 industry average. Its 1.94 forward non-GAAP PEG ratio is 110% higher than the 0.93 industry average.

DLTR’s forward EV/Sales and Price/Cash flow multiples of 1.55 and 16.01, respectively, compare with the 1.43 and 12.59 industry averages.

Consensus Ratings and Price Target Indicate Potential Upside

Of the 18 Wall Street analysts who rated DLTR, eight rated it Buy, nine rated it Hold, and one rated it Sell. The $153.12 median price target indicates an 11.3% potential upside. The price targets range from a low of $100.00 to a high of $175.

POWR Ratings Reflect Uncertainty

DLTR has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

DLTR has a C grade for Sentiment and Quality. Mixed analyst estimates justify the Sentiment grade. In addition, DLTR’s 5.29% trailing-12-month net income margin is 19.4% lower than the 6.56% industry average, which is in sync with the Quality grade.

Of the 40 stocks in the A-rated Grocery/Big Box Retailers industry, DLTR is ranked #34.

Click here to view additional DLTR ratings for Growth, Momentum, Value, and Stability.

Bottom Line

DLTR was the last actual dollar store operating in the United States. However, its recent price hike reflects the impact of inflation on the global economy. The demand for dollar tree products is expected to continue. In a survey conducted by the company regarding the price hike, the company reported that 91% of survey participants indicated that they would keep shopping at DLTR stores at the same or an increased rate. However, continuing supply chain bottlenecks are expected to maintain pressure on the company’s lean profit margins. Thus, we think investors should wait until DLTR’s profit margins and EPS improves before investing in the stock.

How Does Dollar Tree, Inc. (DLTR) Stack Up Against its Peers?

While DLTR has a C rating in our proprietary rating system, one might want to consider taking a look at its industry peers, Albertsons Companies, Inc. (ACI), Walmart Inc. (WMT), and Target Corporation (TGT), which have an A (Strong Buy) rating.

Recently the Reitmeister Total Return Portfolio (RTR) closed a winning trade in TGT for a 65% gain. Learn more about the RTR service here.

DLTR shares were trading at $134.15 per share on Tuesday afternoon, down $7.20 (-5.09%). Year-to-date, DLTR has gained 24.17%, versus a 23.46% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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