It seemed like a good idea at the time.
On July 6, 2015, Bob Sasser, then-CEO of Dollar Tree (DLTR) , said that the discount variety store company had completed the nearly $9 billion acquisition of Family Dollar Stores.
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The deal came after a bidding war with rival Dollar General, and the Dollar Tree people were feeling pretty good.
“This is a transformational opportunity for our business to offer broader, more compelling merchandise assortments, with greater values, to a wider array of customers,” Sasser said in a statement. “We plan to leverage best practices across both organizations to deliver significant cost synergies.”
Those cost synergies didn’t materialize over the last nine years and on June 5, Dollar Tree said it had “initiated a formal review of strategic alternatives” for the Family Dollar segment, “which could include among others, a potential sale, spin off or other disposition of the business.”
“Separating the two businesses could enhance the performance of each one individually and allow them both to reach their true valuation potential,” Rick Dreiling, Dollar Tree’s chairman and current CEO, said during the company’s first-quarter earnings call. “We have been on a multi-year journey to transform this organization and fully unlock its intrinsic value.”
Dreiling said that an important step in the process was a portfolio review and the decision to close 970 underperforming Family Dollar stores.
Analysts react to Dollar Tree’s first-quarter earnings report.
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Dollar Tree CEO describes multi-price strategy
“While we are working to transform Family Dollar, we continue to aggressively grow the Dollar Tree banner by expanding our multi-price offering, accelerating our rate of new store openings, and pursuing accretive transactions like our recent acquisition of up to 170 stores out of the 99 Cents Only bankruptcy,” he said.
Regarding first-quarter earnings, Chief Financial Officer Jeff Davis said in a statement that the company’s “operating performance was solid despite a soft Easter season for Dollar Tree.”
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“The results reflect our operating discipline and careful expense management throughout the quarter,” he added.
Dreiling discussed More Choices, the company’s multi-price strategy. This strategy calls for expanding the company’s multi-price assortment by over 300 items at prices above $1.25 in roughly 3,000 Dollar Tree stores by the end of the year.
“Multi-price has never been about raising prices on existing items,” he said. “It’s about adding new items at new price points that are incremental to our core assortment.”
“Multi-price is designed to complement our core $1.25 strategy, not replace it,” Dreiling added.
Dollar Tree reported adjusted earnings of $1.43 per share, down from $1.47 per share a year ago, on revenue of $7.63 billion, up 4.2% from the year-ago tally.
The performance met the expectations of analysts surveyed by Zacks Investment Research.
Looking ahead, Dollar Tree said that it expects second-quarter earnings to range from $1 to $1.10 per share with revenue of $7.3 billion to $7.6 billion.
Analysts polled by FactSet are calling for earnings of $1.19 per share on revenue of $7.59 billion.
The company forecast full-year earnings between $6.50 and $7 per share on revenue from $31 billion to $32 billion. Wall Street is looking for earnings of $6.89 per share on revenue of $31.36 billion.
After the earnings announcement, several analysts adjusted their stock price targets for Dollar Tree.
Analyst expects ‘profitability challenges’
Bank of America Securities analyst Robert F. Ohmes maintained his underperform rating on Dollar Tree while slashing his price target to $117 from $120.
The analyst expects comparable sales to remain pressured in the second quarter and lowered his second-quarter comp sales forecast to +1.7% from +2.7%.
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However, he said that he expects easing comparisons and the ramping up of multi-price Dollar Tree stores to drive sequential comp improvement in the second half.
“We expect continued profitability challenges to offset recent traffic improvements, as strategic initiatives at both banners could pressure mix and elevate SG&A expenses,” Ohmes told investors, referring to selling general and administrative costs. “We also see increasing competitive risks at the Dollar Tree banner as it competes at higher price points.”
Piper Sandler analyst Peter Keith lowered the firm’s price target on Dollar Tree to $143 from $168 and kept an overweight rating on the shares.
While first-quarter sales and earnings per share were in line with estimates, comp growth showed weakness due to deceleration at the core Dollar Tree banner due to an early Easter combined with unfavorable weather, Keith said.
Although the comp and margin ramp for the second half of the year looks even steeper, Dollar Tree does have identifiable sales and margin drivers for the back half that make the revised EPS guide look achievable – albeit at the low end of the range, Piper said.
Citi downgraded Dollar Tree to neutral from buy with a price target of $120, down from $163.
While the Family Dollar turnaround has been on “shaky ground” for several quarters, the decision to explore strategic alternatives shows that management lacks confidence in the fix, signaling more structural issues than previously expected, the analyst tells investors in a research note.
The firm said that with the Dollar Tree business falling short of comp plans in the first quarter and the rollout of multi-price points facing execution issues, the story is “becoming more complicated in a still uncertain consumer environment,” making the stock’s risk/reward more balanced.
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