Company Overview: Dollar Tree Inc. (NASDAQ: DLTR) operates discount variety stores that provide retail and other assortments of services. It offers a broad range of general merchandise products, such as housewares, candies, seasonal goods, toys, cosmetics, health and self-care products, gifts, stationery, books, and other consumer items. DLTR owns DollarTree.com (Dollar Tree), an e-commerce platform, and Family Dollar Stores, Inc. (Family Dollar), which it acquired in July 2015. As of July 31, 2021, DLTR's store count was 15,865, spread across 48 states and 5 Canadian provinces.

DLTR Details

Key Takeaways from Q2FY21 (ended July 31, 2021)

• Slight Growth in Revenue: In Q2FY21, the company's total revenue amounted to USD 6.34 billion, representing a 1.04% increase year-over-year from USD 6.28 billion.
• Decline in Gross Margin: DLTR reported a gross profit of USD 1.86 billion for the current quarter, representing a lower gross margin of 29.4% vs. 30.5% for Q2FY20 because of higher freight costs.
• Improvement in Net Income: The net income for Q2FY21 was USD 282.4 million vs. USD 261.5 million in Q2FY20, representing diluted earnings per share (EPS) of USD 1.23.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Real Estate Developments: In its Q2FY21 Release, DLTR stated that it is making significant efforts to expand and manage its market position across urban, suburban, and rural regions.

• There were 3,300 Family Dollar H2 stores at the end of Q2FY21, including the 435 stores that were renovated during the quarter.
• Its Dollar Tree Plus initiative, which consists of adding a multi-price assortment to the "everything-is-one-dollar" format, was observed to be a big hit with customers. The multi-price assortment is currently available in 340 stores, with an expected target of 500 stores by FY21 end.
• The company launched its brand-new Combo Store format in March 2021, which offers the multi-price assortment to Dollar Tree and the one-dollar-per-product assortment to Family Dollar segments. There are 105 Combo stores currently operating.

Other Key Findings in Q2FY21

• In Q2FY21, DLTR bought back 7,006,326 shares for USD 700 million and had USD 1.45 billion remaining under its share repurchase authorization at quarter-end.
• The company reported 131 new store openings, 30 store expansions/relocations, and 37 store closures during the quarter. It also completed 470 renovations to the Family Dollar H2/Combo store formats.
• At quarter-end, there were 7,934 Dollar Tree stores and 7,931 Family Dollar stores, with a combined selling square footage of 126.8 million sq. ft.

Stores Highlights; Analysis by Kalkine Group 

Balance Sheet & Liquidity Position

• Declining Cash Balance: The company exited Q2FY21 with a cash balance of USD 720.8 million, 49.12% less than USD 1.42 billion at the end of FY20.
• Cashflow from Operations: Operating cash inflow in H1FY21 was USD 736.1 million vs. USD 1.44 billion in H1FY20 due to increased merchandise inventories and reduced current and other liabilities.
• Increasing Debt: DLTR's total outstanding debt amounted to USD 3.23 billion at Q2FY21 end, almost at par with the reported total debt as of January 31, 2021.

Key Metrics: In Q2FY21, DLTR's operating and net margins were 6.3% and 4.5%, slightly higher than 6.0% and 4.2%, respectively reported in Q2FY20. ROE stood at 3.9%, at par with the Q2FY20 return. Debt/Equity was 0.46x as of July 30, 2021, vs. the industry median of 0.68x.

Profitability and Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 38.28% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Co., N.A. hold the maximum stake in the company at 10.88% and 4.92%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Disruptions in Distribution Network: DLTR is experiencing ocean shipping disruptions, trucking shortages, increased shipping, trucking, and fuel costs, and the distribution costs have been consistently rising for the last several years. These disruptions could negatively impact the company's top and bottom-line performance.
• Supplier Concentration: In FY20, the company purchased and delivered around 13% of its products under the Family Dollar segment through McLane Company, Inc. Its frozen and refrigerated products and chocolates (in summer) under Dollar Tree stores are also delivered by third parties. Deterioration in DLTR's relationship with McLane or other providers could hurt its operations.
• US-China Trade War: DLTR sources a significant majority of its merchandise imports from China. Any supply chain disruption in the imports from China due to prevalent trade tensions could adversely affect the company's profits.
• Stiff Competition: It operates in a highly competitive retail industry, which has no concrete economic barriers. Other companies can enter the market with no substantial capital expenditure.

Outlook

• DLTR plans to add 1,500 stores under its Dollar Tree Plus initiative in FY22 while targeting 5,000 Dollar Tree Plus stores by the FY24 end.
• It also expects to add 400 new, renovated, and relocated Combo Stores by next year, and launch at least 85% of new Family Dollar stores as Combo Stores in FY22.
• In financial terms, for Q3FY21, the company expects to generate USD 6.40 billion to USD 6.52 billion in net sales, with diluted EPS ranging from USD 0.88 to USD 0.98.
• Its FY21 net sales estimates are USD 26.19 billion to USD 26.44 billion, and the diluted EPS range is USD 5.40 to USD 5.60.
• Freight expenses are estimated to be USD 1.50 to 1.60 per diluted share higher in FY21 than in FY20. This is based on higher spot market rates and the assumption that DLTR’s regular ocean carriers' capacity will reduce to 60-65% of their contractual commitments.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last nine months, DLTR’s share price has corrected ~19.39%. The stock is currently close to the lower end of its 52-week range of USD 84.41 to USD 120.37. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a discount compared to its peer's average, considering the disruptions in its distribution network, dependence on few third parties for its deliveries, and trade restrictions. We have taken peers like Dollar General Corporation (NYSE: DG) and Target Corporation (NYSE: TGT). Considering the decent top and bottom-line performance, expansion plans, new store openings, positive outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 89.99, down ~0.61% as of September 01, 2021.

DLTR Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.