Dollar Tree Surges To All-Time Highs, And There’s More To Come

A 14% move higher on Tuesday had shares of discount retailer Dollar Tree (NASDAQ: DLTR) closing at an all-time high for the first time since April of this year. This is something investors love to see and it bodes well for the company as they prepare to share their latest earnings report next week. With a 30% increase in the stock since July, compared to only 9% in the S&P 500 over the same time period, it’s fair to say that both Wall Street and investors alike are feeling bullish about Dollar Tree’s potential future growth. 

This marks a change from how the stock performed after their Q2 earnings in August, where a bad miss on quarterly revenue precipitated a 20% drop over the following four weeks. But the bears weren’t in control for long, and since the end of September, shares have only been going in one direction; up. 

Activist Takeover

Aside from a much-anticipated earnings report, there are also a number of factors in play that are driving shares higher. Chief among those is the recent news of an activist takeover which broke earlier this month. The fact that shares have seen a strong bid since the end of last quarter suggests that there were plenty of investors who bought into the growing rumor of such a takeover, and now we have confirmation. 

According to the Wall Street Journal, activist group Mantle Ridge has built up a $1.8 billion stake in the company, which means its ownership now extends to beyond 5% of the business. As is usually the case with activist shareholders, Mantle Ridge is expected to apply pressure to Dollar Tree’s leadership to make strategic improvements, specifically to its stores and pricing strategies. It’s not the first time this has happened to the Virginia headquartered company. In 2019, another activist investor group, Starboard Value, went head to head with Dollar Tree’s management and was able to entice them to make some of their suggested changes. 

On the back of last week’s news, the folks over at Deutsche Bank upgraded their rating on Dollar Tree stock yesterday from a Hold to a Buy rating. Analyst Krisztina Katai and her team wrote in a note to clients that "the added element of a new large shareholder with a clear focus on unlocking meaningful value by closing the profitability gap between Family Dollar and Dollar General (NYSE: DG) should lead to a more patient investor base with a longer-term focus, and frankly translate to one of the most compelling retail stories with an exciting narrative change underway. While many investors view Family Dollar as structurally challenged, we are in the camp that believes a fresh set of eyes with an approach taken out from the DG playbook could prove to be exactly what DLTR needs."

Price Target Boosted

In addition to the upgrade, Deutsche also boosted their price target on the stock to $148, which suggests there’s still an upside of some 14% to be had even after Monday’s jump. Deutsche’s bullish stance echoes that of Oppenheimer who came out with some optimistic comments on Dollar Tree at the end of September. Analyst Rupesh Parikh and the team felt particularly bullish about the company’s pricing announcement, which will have items selling for above $1. They think this represents a real solution to offset elevated labor and freight cost headwinds that are likely to extend beyond 2021 and is a reflection of the company’s ability and desire to stay nimble. 

These new strategies and upgrades, as well as a recently announced share repurchase program, are all strong tailwinds that should continue to move shares higher in the coming weeks. But investors must be conscious of how hyped up the stock is right now in advance of the coming earnings report. The stock’s RSI is well above 80 suggesting extremely overbought conditions, and if the coming earnings numbers fail to live up to the hype, there’s a good chance we’ll see some volatility. But even if that happens, there are enough good indicators and tailwinds behind Dollar Tree right now to suggest that this weeks’ all-time high is going to be only the first of many in the coming months.