Dollar Tree Promisingly Positioned For Long-Term Growth Despite Recent Share Decline: Analyst

BMO Capital Markets analyst Kelly Bania reiterated the Outperform rating on Dollar Tree, Inc. DLTR, with a price target of $170.

The analyst notes management's strategies, plans for Family Dollar, and opportunities to improve the high-returning Dollar Tree format further.

Management does not sugarcoat the magnitude of significant changes required following years of underinvestment at the company. 

The analyst highlights that management still sees an opportunity for 16,000 more small box stores, suggesting the channel is not over-stored. Bania notes that the economy is creating more dollar stores for core customers, and higher volume and return requirements prevent big competitors from entering certain locations. 

The analyst underscores that DLTR acknowledges that its customers' trip is largely a fill-in, with 60% of wallet still spent at Walmart Inc. WMT. 

The analyst adds that DLTR's share price has fallen 26% since F2Q24, primarily on multiple compression, as F25E consensus estimates are only down 3%. 

Bania's Outperform thesis is supported by a favorable risk/ reward. 

The analyst sees a path towards ~$5 in incremental earnings potential for DLTR.

Longer-term Bania suggests a potential earnings power of >$10 in EPS at DLTR (~$5 in incremental earnings + F24 EPS of $5-$6). At 20x P/E this means a share price of $200.

Bania believes there is potential for $2+ in EPS due to a reversal of freight headwinds, $2 in EPS longer-term if Family Dollar can close just half of the profitability gap to Dollar General Corporation DG, and nearly $1 in one-time price investments and charges at FD. 

Bania's current model implies Family Dollar's sales per sq. ft reach only to 8% below DG by 2026 (F27) from 13% below DG this fiscal year-end (F24E/calendar 2023).

Price Action: DLTR shares are trading lower by 1.21% to $105.12 on the last check Friday.