Dollar Store Bears Come Out Of Hibernation; Deutsche Stays Positive On Dollar Tree

Bears On Questioning Mode

Analyst Paul Trussell and Tiffany Kanaga noted that the bears questioned the significant margin improvement at Family Dollar, with some thinking the management's target as out of reach due to structural impairments.

"As we stand nearly two years out from the closing, bears expressed disappointment at flattish comps instead of upwards of +MSD through quick wins, and are concerned that flaws in the business model rather than transient issues like SNAP are to blame," the analysts added.

Deutsche Bank Among Dollar Tree Bulls

Deutsche Bank believes the Street's same-store sales expectations are too high. That said, the firm expects sourcing, procurement, merchandising, presentation and back office synergies and improvements to help meet or exceed margin target, even with 1–2 percent same-store sales and no real sales productivity growth. That said, the firm sensed real concern over a potential need for store manager spend in light of Dollar General's actions plus possible price investments.

Lukewarm Sentiment Toward Dollar General

On Dollar General, Deutsche Bank noted that bulls struggled to list positives beyond lapping headwinds in the second half, while bears seized on the competitive backdrop, threats from Aldi and Lidl and the potential for more price investments ahead.

Positive On Dollar Tree; Sidelined On Dollar General

Concluding, Deutsche Bank said, "We are positive on DLTR through underappreciated margin expansion potential even without sales productivity improvements, in our view, and content to be sidelined on DG as we await profit algorithm visibility."

Given its expectation for a better second half backdrop, with reversing deflation & SNAP, the firm said it is constructive on the sector, especially with valuation having come in with current macro issues, poor sentiment, increasing competition and BTA.

Rating/Price Target

• Dollar General: Hold/$78.
• Dollar Tree: Buy/$95.

The Amount Of Retail Bankruptcies This Year Is Reaching A Scary Number Are Monthly Retail Sales Noise Or News? ________ Image Credit: By Ildar Sagdejev (Specious) - Own work, GFDL, via Wikimedia Commons