By the looks of it, Dollar Tree (NASDAQ:DLTR) is going to beat analysts’ expectations for profits when they report earnings on November 24. And if you believe things like the “whisper number” the beat in earnings would be substantial on a year-over-year basis.
Even though revenue of $6.11 billion will be down from the prior quarter, analysts tend to love profit numbers. And with a margin-intensive business like the dollar store chains that could suggest DLTR stock is ready to pop. That would be a relief to investors who have seen the stock struggle to hold onto a positive gain for the year.
However, for all the good that I expect you may hear from the company tomorrow, there’s one number you need to pay keen attention to. That number is the revenue Dollar Tree receives from online sales. While that may seem obvious, let me explain my point.
Buying in Bulk Dilutes the Value Proposition
Much of what consumers can buy online from Dollar Tree must be purchased in bulk. That has two problems. First, many consumers don’t need bulk quantities of things. And if they do, they’re probably shopping at Costco (NASDAQ:COST) or another warehouse chain. And second, that defeats the allure of Dollar Tree which is that you can buy many items for $1.
However In June, the company announced that certain items could be purchased in smaller quantities. And while smaller quantities meant less than a case, it still means that individuals could still be paying for more than they reasonably need. While it may not be a question of affordability, it seems needlessly clunky when customers have more convenient options.
States Are Locking Down Again
In many states, things are becoming more restrictive as hospitalizations surge due to the novel coronavirus. And while the measures may not be as extreme as those undertaken in the spring, they have the same effect of restricting movement.
Does this mean individuals won’t go into a brick-and-mortar Dollar Tree store to shop? Perhaps not. However, if more consumers are staying home, they may be choosing to have groceries and personal items delivered from more established online retailers such as Walmart (NYSE:WMT) or Amazon (NASDAQ:AMZN).
The Turnaround Is Almost Complete
Ok, that’s the bad news. The good news for investors willing to overlook the short-term is that the company’s multiple year restructuring due to the acquisition of Family Dollar is nearly complete. The company has renovated a number of Family Dollar stores. The Family Dollar chains have been a drag on profitability, and the company is optimistic that profits will reverse course. And the current earnings report may be evidence that the turnaround is happening.
Furthermore, the company is continuing its expansion plans. Although the combined Dollar Tree and Family Dollar names have over 15,000 nationwide locations, the company had planned to open 325 Dollar Tree stores and 175 Family Dollar stores in 2020. Some of those plans may be delayed due to the unrest in some cities.
In its latest earnings call, the company reported that over 100 stores were impacted by civil unrest, resulting in losses of nearly $17 million ($16.8) due to store damages, repairs, and lost inventory. With less unrest being reported since the election, investors will look to see those numbers coming down.
Is Dollar Tree a Buy?
In October, my MarketBeat colleague Thomas Hughes felt that Dollar Tree was undervalued when it was selling around $89 per share. That sentiment was probably reasonable at that time. Now with the stock at $95 and looking to climb after its earnings report, I’m not as sure.
If you’re willing to buy and hold Dollar Tree stock, there may be a nice payoff. The economic outlook for 2021 will still be choppy even if a Covid-19 vaccine is delivered without a hitch. And that means that there will still be pressure on household budgets as unemployment will remain stubbornly high.
However, that may be offset by additional stimulus measures for people who are displaced and forced to stay at home. That would have horrific long-term effects for our monetary system, but it would certainly be a catalyst for Dollar Tree stock.
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