Buckingham Initiates Buy Ratings On Dollar Stores

Buckingham Research has initiated coverage of Dollar General Corp. DG and Dollar Tree, Inc. DLTR with Buy ratings. The firm has a price target of $94 on Dollar General and $96 on Dollar Tree.

Analyst John Zolidis believes Dollar General shares offer investors a way to play both offense and defense in their portfolios. Dollar General offers offense via its store growth and an upward bias to estimates, and defense due to its cyclical model and strong cash flow characteristics.

"We believe there is an upward bias to earnings estimates based on our analysis of new stores, which shows these are tracking to the most productive sales levels in the company's history at $182 in sales/ foot," the analyst wrote in a note to clients.

Meanwhile, the analyst expects consistent LSD growth in same-store sales, driven by the natural maturation curve as well as merchandising initiatives.

Zolidis noted that the competitive front may be more favorable than any time in the recent past due to the DLTR/ FDO merger and Wal-Mart Stores, Inc. WMT's decision to back away from the Express format.

On Dollar Tree, the analyst said shares represent a compelling opportunity to participate as management unlocks synergies, drives higher sales productivity and delevers the balance sheet post last year's acquisition of Family Dollar.

"We believe the combination offers upside to targets, will create value for shareholders and lays the foundation for many more years of growth," Zolidis said.

The merger with Family Dollar creates significant scale advantages (2x the revenues), increased store growth potential, diversifies the store and customer base, and creates at least $300 million of cost synergy opportunities.

"We also estimate a $1B revenue opportunity if DLTR can close 1/2 the productivity gap with Dollar General. While we are mindful of the integration risks and challenges we feel confident in DLTR management's ability to execute and believe shareholders will be rewarded as progress on the deal is reported," Zollidis noted.

The core Dollar Tree remains attractive, as prior to the acquisition, Dollar Tree's same-store sales, EBITDA growth and returns were among the highest in the retail sector.

"We expect this performance to continue and note the concept has an opportunity for ~2,000 incremental stores in the U.S. and Canada (representing 33% growth on the current base)," Zollidis added.