Bernstein: The Day To Upgrade Dollar Tree 'Has Finally Come'

The bullish case for Dollar Tree, Inc. DLTR "has finally come" after the company worked to erase the perception that its Family Dollar business is valued at zero, according to Bernstein.

The Analyst

Analyst Brandon Fletcher upgraded Dollar Tree's stock rating from Market Perform to Outperform.

The Thesis

The Family Dollar unit is believed by some to carry zero value, but Dollar Tree has taken necessary steps to at least give the unit some option value, Fletcher said in the upgrade note. (See his track record here.)

Dollar Tree is actively "doing the harder work" so the chain will be at least "worth something," including a rapid acceleration of the remodeling 1,000 stores annually and the addition of 100 basis points to Dollar Tree's comps, the analyst said. 

Ongoing efforts to lower tariff risk and enact joint buying initiatives with Family Dollar should improve gross margins by 60 basis points, Fletcher said. Encouragingly, both brands should also hold up "relatively well" in an economic downtown, he said. 

In Bernstein's view, Dollar Tree's stock includes a "free option" given the recent involvement of activist investor Carl Icahn.

If the stock does not rebound and delight bulls, there is an opportunity for activists to push for a sell of the improved Family Dollar brand that could be worth more to rival dollar store retailers or a private equity buyer, Fletcher said. 

Price Action

Dollar Tree shares were trading higher by 0.61 percent at $85.57 before the close Friday. 

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Photo by M.O. Stevens/Wikimedia.