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3 Reasons Dollar Tree Is a Buy

By Pearl Wang - Updated Feb 17, 2021 at 8:18AM

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This discount retailer is set up to succeed in a world with or without COVID-19.

Dollar Tree's (DLTR 2.59%) business was strong in 2020, as consumers spent more on staples like groceries and household goods. The stock-up effect created by the coronavirus pandemic helped many necessities-focused retailers, and Dollar Tree saw its results boosted, with a 28.7% increase year over year in earnings per share during its third-quarter report (for the quarter ended Oct. 31, 2020). The prior quarter saw earnings per share increase by 44.7%.

While the current macro drivers will likely ease as coronavirus cases continue to decrease, Dollar Tree is still positioned to perform well over the long term.

Here are three reasons Dollar Tree's shares are worth a look.

Happy shoppers at a store

Image source: Getty Images.

1. The Instacart partnership is a positive for the company

The Family Dollar division announced on Feb. 4 that it would partner with Instacart to offer same-day delivery of goods from more than 6,000 Family Dollar stores. This follows the successful pilot delivery program in 275 Family Dollar stores in late 2020.

While part of Dollar Tree's strategy is to have its 15,000-plus stores located in convenient areas near other stores and in dense neighborhoods, shoppers are increasingly expecting even more convenience. Offering delivery and buy-online-pickup-in-store options (BOPIS) allows the retailer to remain competitive with other discount retailers like Walmart and Target, which have strong omnichannel and same-day delivery options, as well as drive additional sales.

2. It's successfully executing a turnaround in the Family Dollar segment

Dollar Tree is continuing to invest in improving business at its Family Dollar stores. CEO Michael Witynski detailed the plan on the third-quarter earnings call: "The key elements of our improvement plan include: improved merchandising and marketing, raising [the] stock, ... upgrading brand standards, creating a selling culture and refining our format strategy." He also mentioned recent initiatives to boost sales like buy online, pickup in-store (BOPIS) and e-commerce.

Management's ongoing strategic improvement plan for Family Dollar, which comprised 46.5% of total company sales in the most recent third quarter, is bearing fruit. During fiscal year 2019 (ended Feb. 1, 2020), Dollar Tree closed over 400 Family Dollar stores and converted 200 Family Dollar stores into Dollar Trees as part of the plan. The company also renovated over 1,100 mature Family Dollar stores during that time. During the third quarter of 2020, Dollar Tree renovated 371 Family Dollar stores.

For the first nine months of 2020, Family Dollar's operating margin improved to 5%, from 2% during the same period a year ago. During the third quarter, the segment's net sales increased by 7.5% year over year.

3. The company is well-positioned given COVID-19 and economic uncertainty

As restrictions and cases of the coronavirus subside, Dollar Tree will continue to be well-positioned as a convenient and value-focused retailer. Even after a return to "normalcy," there may be lingering economic uncertainty, which will likely boost business at retail outfits offering discount merchandise.

Furthermore, the company is implementing improvements to increase revenue in the competitive retail space. These efforts around merchandising and innovation should help with revenue and margins. The company's merchandising initiative of Dollar Tree Plus! (beginning in 2019), which offers additional products at multi-tiered prices points mostly between $3 and $5, should help margin expansion in the future. The discounter plans to roll out Dollar Tree Plus! to about 500 stores in 2021.

"We like the sales that these are the product that we're putting in there at the $3 and $5 price point are selling," Witynski said on the third-quarter earnings call. "It's also selling at a much higher margin because it's discretionary product and we're able to manufacture these products and bring value to the customer."

Overall, Dollar Tree looks well-positioned in the long term, with a reasonable valuation: 16.8 times forward P/E, below the S&P 500's average of 22.7. Given its ongoing strategic initiatives and positioning as a leader in value-focused retail, shares look like a solid investment.

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