MKM Partners Expects Dollar Tree To Report Strong Same-Store Sales, Solid Margins In Q4

In a report published Monday, MKM Partners analyst Patrick McKeever previewed Dollar Tree, Inc.'s DLTR fourth quarter print and argued the company is set to report another quarter of strong same-store sales and solid margins.

McKeever projected that Dollar Tree on Wednesday will report a "strong print" with comps up 5.5 percent as sales picked up in January.

"We look for high quality earnings growth, as we believe gross margin was better than it has been over the past several quarters, even with anticipated pressure from higher freight expense and strategic investments in product quality," McKeever wrote. "Dollar Tree is up 10 percent year to date and is trading at an all-time high, but we think it can continue to work, given an improving macro environment for the company's core customer and likely synergies and earnings accretion associated with the forthcoming acquisition of Family Dollar."

McKeever added that he continues to expect at least $300 million in annual run-rate synergies and high-single-digit earnings per share accretion from its acquisition. However, the analyst noted that "we are going to wait until we get a little more clarity" on several items, including timing while an update on the FTC review is expected on Wednesday.

Looking forward, the analyst stated that post-acquisition, the company will operate more than 13,000 stores in 48 states and "only" about 200 stores in Canada, which minimizes the effects of a strong dollar on the company's profit. As such, Dollar Tree is expected to be "the number one player in the industry."

McKeever projected Dollar Tree will report a fourth quarter ex-items earnings per share of $1.14 which does not include $7 million in acquisition-related expenses. Operating margin is projected to rise 20 basis points from a year ago to 15.8 percent with flat gross margins which marks an improvement from the 35 to 80 basis point decreases in the first nine months of 2014.

Shares are Buy rated with an $88 price target.