Discount retailer Dollar Tree (NASDAQ:DLTR) had an impressive day yesterday as shares of DLTR stock gained more than 5% throughout the course of trading.
The surge can be credited to the company’s fourth- quarter results, which came in stronger than expected and reignited confidence in the firm’s turnaround potential. Ever since acquiring its competition, Family Dollar, nearly 4 years ago, Dollar Tree has been struggling to turn things around.
However, the firm finally managed to eek out some positive figures this quarter, silencing calls for DLTR to sell Family Dollar — at least for now.
Strong Same Store Sales
Q4 comparable sales were a bright spot for Dollar Tree; the firm reported a 2.4% increase in overall same-store sales. Dollar Tree locations saw comps rise 3.2% while Family Dollar stores reported a 1.4% increase. That was a huge win for DLTR stock because comps have been flat at best over the past three quarters of 2018.
While the figures don’t hold a candle to DLTR’s 5% growth back in 2017, they suggest a comeback is starting to materialize.
While the results gave a lift to DLTR stock, the true litmus test will be Dollar General’s (NYSE:DG) results, due out on March 14. Arguments for a Family Dollar sale have been based around the fact that DG has been widening the gap between the two stores significantly since the acquisition. DG has been consistently posting strong comps figures while DLTR struggled to avoid a decline in same store sales. If Dollar General’s comps are meaningfully higher than DLTR’s next week, it could dull the shine of Dollar Tree’s results.
Store Closures… And Why They’re a Good Thing
The other aspect of Dollar Tree’s results that investors were cheering was the fact that the company closed 84 Family Dollar stores in Q4 and plans to revamp 1,000 stores in different ways this year. The company is also planning to shut down an additional 390 Family Dollar locations throughout 2019.
The Family Dollar brand has been dragging down Dollar Tree’s results for years, so investors also applauded the company’s decision to cut down on Dollar Tree locations and rebrand 200 existing stores under the Family Dollar name.
What’s Next for DLTR Stock
Guidance for 2019 was unimpressive. The firm is expecting comparable sales growth in the low single digits and revenue to come in between $23.45 billion and $23.87 billion. EPS are expected to be between $5.16 and $5.56.
Dollar Tree’s pop following its Q4 results was deserved; the figures paint a picture of a turnaround that is finally materializing. Management has firmly refused to sell Family Dollar despite its challenges, but Dollar Tree’s plan to integrate the brand appears to be on track.
DG’s results will provide a good comparison as to how far DLTR stock has to go before its turnaround efforts are on firm footing, but for now things look promising. In the coming year, investors should be focusing on Dollar Tree’s margins, which declined 220 basis points to 30.8% during the fourth quarter.
While the $1-per-item format has been a major reason dollar stores survived the retail apocalypse and haven’t been pushed out by online retailers, a change to that format is necessary in order to grow margins. This year we could see Dollar Tree push higher price points of $1.50 and $2 into its store, a move that could be beneficial in several ways. It would give the firm’s profits a boost, but it could also help drive store traffic because it would allow the company to add higher quality items to its inventory.
The Bottom Line for DLTR Stock
The Q4 results show that DLTR stock is on track to make a successful turnaround, but there are still plenty of hurdles to cross. The stock is particularly vulnerable to Dollar General’s results, and the coming year will be an important one in solidifying the successful turnaround.
However, comps are still a worry and Dollar Tree won’t be able to call it a win until proves that it can keep up, and eventually surpass, rivals.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.