A poor performer in 2024 so far, Dollar Tree (NASDAQ:DLTR) stock needs to pick a direction — preferably, to the upside. However, an imminent rally is unlikely in light of the retailer’s financial results and major announcement.
Even though Dollar Tree sells discounted products, it doesn’t mean DLTR stock is a bargain. Bear in mind that Dollar Tree also owns the Family Dollar brand, which has weighed on the company’s top and bottom lines for years.
For what it’s worth, Dollar Tree remains profitable despite Family Dollar’s lackluster performance. During a time of sticky inflation and economic uncertainty, Dollar Tree should continue to generate decent revenue from low-priced goods.
However, whether the company can engineer a turnaround and bring more investors into the fold is another story.
Giving up on a bad investment
“Dollar Tree has been on a multi-year journey to help the Company fully achieve its potential,” declared Chief Executive Rick Dreiling in the recent corporate announcement.
Apparently, that “journey” may include effectively giving up on the Family Dollar brand.
As a proud cheapskate myself, I can attest that there’s a vast difference between Dollar Tree and Family Dollar stores. Regardless of what city I’m in, when I see one of those green Dollar Tree store signs, I know exactly what I’ll see inside: a wide array of products, each costing $1.25 plus tax.
It’s a different story entirely with Family Dollar, where the product prices vary, and unless there’s an emergency, I’ll keep driving until I find a Dollar Tree store. I suspect that some of my fellow bargain hunters do the same thing.
Just as I’ve given up on Family Dollar as a discount shopper, Dollar Tree may end up abandoning the brand in the near future. Dollar Tree paid a hefty $8.9 billion for Family Dollar, but last year, it announced plans to close about 970 Family Dollar stores.
Dreiling attempted to spin this as a positive development, claiming that Dollar Tree is shuttering all of those Family Dollar stores to “focus on enhanced investments in remaining Family Dollar stores that present favorable opportunities for long-term growth and transformation, with more attractive returns on capital.”
That sounds great, but as always, investors should watch what the company does rather than what management says.
The company just disclosed that it has “initiated a formal review of strategic alternatives” for Family Dollar. This “could include, among others, a potential sale, spin-off or other disposition of the business.”
Thus, the CEO’s positive spin doesn’t pass the common-sense test. If Dollar Tree really saw “favorable opportunities for long-term growth and transformation” and “more attractive returns on capital” with the Family Dollar brand, then it wouldn’t consider divesting all of those Family Dollar stores.
Thus, at least to me, it just sounds like Dollar Tree is giving up on a bad investment.
Dollar Tree’s uninspiring quarter
In other news, Dollar Tree just released its results for the first quarter of its fiscal 2024, which ended on May 4. Floundering DLTR stock really needed a positive catalyst, but there wasn’t much to get excited about in those quarterly results.
To recap, the company’s net sales increased 4.2% year over year to $7.63 billion, which was in line with Wall Street’s consensus estimate. Meanwhile, Family Dollar’s same-store net sales only grew 0.1% year over year.
On the bottom line, Dollar Tree reported adjusted earnings of $1.43 per share, down 2.7% year over year. Like Dollar Tree’s first-quarter revenue, this result was in line with the analysts’ consensus forecast.
This would be a good time to conduct a value check using the good, old price-to-earnings (P/E) ratio as a valuation gauge.
I calculated that Dollar Tree’s EPS for the past four quarters was 91 cents + 97 cents + $2.55 + $1.43, or a total of $5.86. If the DLTR share price is around $120, then the retailer’s trailing 12-month P/E ratio would be $120/$5.86, or around 20.5.
That might sound like a low valuation, but the sector median P/E ratio is 17.64. Therefore, Dollar Tree stock isn’t necessarily a compelling bargain based on that old-school metric.
Moreover, as the company releases ho-hum quarterly results and seems ready to completely give up on Family Dollar, there’s just no clear incentive to open a share position in Dollar Tree.
