Core Focus And 30 Conversions Will Boost Efficiency

Key Takeaways

• The Family Dollar sale will streamline operations, potentially improving revenues and net margins through a focus on core business activities.
  
• Expanded multi-price assortments and store format changes could drive higher sales, improving customer basket size and positively impacting earnings.
  
• Transition and strategic challenges like tariff exposure, rising costs, and pricing strategies may impact Dollar Tree's margins and revenue growth trajectory.

Catalysts

Operates retail discount stores.

• The sale of Family Dollar will allow Dollar Tree to focus on its core business, potentially improving revenue and net margins by streamlining operations and reducing complexity.
  
• The expanded multi-price assortment, especially in the 3.0 format stores, could drive higher sales and improve earnings due to an increased size of customer baskets.
  
• Targeted conversions of additional Dollar Tree stores to the 3.0 format are expected to drive further sales and revenue growth as customers continue to respond positively to the expanded assortment.
  
• Efficiency improvements in the supply chain, including tariff mitigations and navigating product sourcing, are expected to stabilize gross margins and protect earnings.
  
• Strong anticipated cash flow and potential share repurchases following the Family Dollar sale could positively impact earnings per share (EPS) by reducing the share count and enhancing shareholder value.

Dollar Tree Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dollar Tree's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 6.3% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $6.6) by about April 2028, up from $1.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.5 billion in earnings, and the most bearish expecting $1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, up from 15.5x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 24.9x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.66%, as per the Simply Wall St company report.

Dollar Tree Future Earnings Per Share Growth

Risks

• The sale of Family Dollar leads to a transitional year with burdened corporate shared services costs and a gradual handover of expenses, potentially impacting net margins.
  
• Continued exposure to potential additional tariffs and uncertainties in mitigation efforts may strain cost structures and influence earnings.
  
• The growing SG&A costs driven by IT upgrades, payroll, and distribution expenses might outweigh gross margin improvements, affecting net margins.
  
• Challenges in executing multi-price store conversions without significantly affecting customer experience and performance could hinder expected revenue boosts.
  
• The economic landscape requires balancing pricing strategies amid inflationary pressures and consumer price sensitivity, which could impact the trajectory of revenue growth and net margins.

Valuation

• The analysts have a consensus price target of $83.189 for Dollar Tree based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $104.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $21.0 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 6.7%.
• Given the current share price of $75.34, the analyst price target of $83.19 is 9.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.