Dollar Tree Is Now A Conviction List Buy At Goldman Sachs

Dollar stores are typically “countercyclical,” with sales slowing late or even preceding downturns, and accelerating during recessions, Goldman Sachs’ Stephen Tanal said in a report. He added that Dollar Tree, Inc. DLTR was benefiting from “secular shifts toward value and convenience,” apart from the ramping of synergies.

Although there are more than 27,500 dollar stores in the US, there is room for an estimated 9,800 additional dollar stores. Analyst Tanal mentioned that this implied “another seven years of growth” for Dollar Tree at the current pace.

Secular And Idiosyncratic Drivers

Dollar Tree’s secular and idiosyncratic drivers seemed “underappreciated,” Tanal stated, and maintained a Buy rating, keeping the stock on the Americas Conviction List.

The company was benefiting from customers opted for value and convenience, against the backdrop of economic growth remaining sluggish and wages continuing to lag inflation. These drivers support square footage growth of 3-4 percent for Dollar Tree, the analyst noted.

Following the acquisition of Family Dollar Stores, Inc. FDO, Dollar Tree is operating in a duopoly. “Substantial synergies implied by conservative targets are only now beginning to ramp, and we expect DLTR to grow EBITDA by 40% in 2016 as Family Dollar seasons, then compound at 13% through at least 2018,” the Goldman Sachs report mentioned.

Tanal expects Dollar Tree’s EPS to nearly double from 2015 through 2018, reflecting 28 percent growth in 2016, and a 22 percent CAGR between 2016 and 2018.

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