Dollar Tree Embraces Higher Prices, Shares Rocket

Mixed Results And Favorable Outlook Spur Dollar Tree 

Shares of Dollar Tree NASDAQ: DLTR are rocketing higher after the Q3 results not because the results were good but because of higher pricing. The results were only OK but higher pricing means they will get better. The company announced it was going all-in on higher prices and raising the minimum price on all items to $1.50. The decision is due to rising inflation and comes after successfully testing the price increase at select stores across the U.S. The company did not give any guidance for the coming year but investors are viewing the price news positively. 

A Mixed Quarter For Dollar Tree

Dollar Tree had a decent quarter if one mixed in regards to the analyst’s consensus and marred by shrinking margins. The company reported $6.42 billion in consolidated revenue which is up 3.9% and exactly as the analysts had expected. The gains were driven by a 1.6% increase in comp sales and company expansion that should continue into the next year. On a two-year basis, comps are up a stronger 6.7%. On a segment basis, Family Dollar led with a 2.7% comp versus only 0.6% for Dollar Tree branded stores. 

Moving down the report the company experienced some margin pressure over the past year but slightly less than expected. The gross margin contracted by 420 basis points but was offset slightly by an improvement in SG&A expenses. At the operating level, the margin shrank a smaller 270 basis points to leave GAAP earnings slightly better than expected as well. The GAAP EPS of $0.96 is a penny better than expected but down significantly YOY due to rising costs. 

Dollar Tree issued updated guidance as well, guidance that would normally have left the market cold. The company narrowed its range for both revenue and earnings putting the consensus figure estimates right at the top of the range. We would consider this weaker than expected guidance if not for the price increase we see driving significant revenue and margin improvement in the next fiscal year. 

Analyst Activity In Dollar Tree Is Heating Up 

The analysts began warming up to Dollar Tree in the week leading up to the Q3 report with 5 of the 14 covering the stock either upgrading the rating, raising the price target, or both. The Marketbeat.com consensus target, however, continue to lag price action so we see this trend continuing. Based on the outlook for price hikes, we are expecting to see estimates or revenue, earnings, and share prices move steadily higher over the next couple of months. The high-price target of $148 was set by Deutsche Bank and is more in line with both the current price action and our own view of the stock. 

The Technical Outlook: Dollar Tree Goes Ballistic 

Shares of Dollar Tree gained another 6.0% in the wake of the Q3 report and look like they will continue higher. The move breaks the stock out of a small consolidation and indicates the continuation of a rally that began only a couple of weeks ago. Our first target for resistance is near the $150 level, a break above that could get this market up into the $180 to $190 range.