Proactive Investors - Dollar Tree, Inc. (NASDAQ:DLTR)'s third quarter earnings report should help the chain of dollar stores re-establish some credibility with the market and support the bull case for the stock, analysts at UBS believe.
The retailer, whose dollar stores include Dollar Tree and Family Dollar, is due to report its financial results on Wednesday, November 29, before the stock market opens.
It has guided 3Q sales in the range of $7.3 billion to $7.5 billion based on a mid-single-digit increase in same-store sales and earnings per share in the range of $0.94 to $1.04.
Wall Street analysts, on average, expect revenue to fall at the midpoint of Dollar Tree’s guidance range at $7.4 billion and see EPS of $1.01.
The UBS analysts believe Dollar Tree’s 3Q performance will once again showcase how business investments, improved execution, and new initiatives continue to resonate with customers.
“We believe the Dollar Tree banner should have maintained its robust traffic momentum and its comps likely outpaced the Family Tree banner, where comps may have slowed in the last weeks of the quarter,” they wrote.
“That said, October was generally a slower month for many retailers, given the impact of continued disinflation and a more competitive pricing backdrop, both of which may have impacted Family Dollar.”
The analysts highlighted that investors will also be looking at how Dollar Tree's margins held up, how it benefitted from the continued decline in freight costs, and the company’s fourth quarter guidance.
They wrote that the ongoing moderation of price inflation and a potentially more promotional backdrop could see the company guide more conservative for 4Q, which they see as possibly being an area of negative surprise.
Looking beyond the 2023 financial year, the analysts wrote that bulls would argue that Dollar Tree will easily achieve $7-plus in EPS next year simply by adding the anticipated freight benefit, assuming no underlying EPS growth.
“Bulls also would say Dollar Tree has a plethora of initiatives to further improve its execution and fuel share gains, including the multi-price point rollout at Dollar Tree, raising shelf heights at both banners and streamlining its distribution,” they wrote.
On the other hand, they wrote that bulls will continue to question the sustainability of its recent share gains, especially if rival Dollar General Corp . (NYSE:NYSE:DG) can improve its execution.
“Bears also would argue that Dollar Tree will not be able to generate $7-plus in EPS next year as it will be required to invest more in the business. This will offset the fundamental improvement and the benefit of lower freight.”
The UBS analysts awarded the stock a ‘Buy’ rating and a 12-month price target of US$177.
Dollar Tree shares traded modestly higher in the early afternoon on Tuesday, up 0.5% at about US$116. The stock is down about 20% in the year to date.
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