How Should Investors Play Dollar Tree After The Q3 Report?

Dollar Tree, Inc. DLTR reported Thursday with mixed third-quarter results and a downward revision to its full-year fiscal 2018 EPS and revenue guidance.

Dollar Tree CEO Says Retailer Nearing An Inflection Point

Dollar Tree CEO Gary Philbin told CNBC's Jim Cramer in an interview that the Q3 results offer investors "clarity" on the retailer's strategy.

The company already said it will undergo store renovations at its Family Dollar brand, with plans to complete up to 1,000 units next year. But the company's store count is around 8,000, which implies a multiyear trajectory with the objective of reaching an "inflection point."

One of the main concerns investors have is the impact of tariffs on imported goods from China. The Family Tree chain imports around double the amount of products from China and Asia than Dollar Tree brand, Philbin said.

Dollar Tree has always been a company that "can control our margins," but the threat of new tariffs is a "real issue for every retailer," he said. 

"We can make selections on products: where do we buy it from and how we make it," the CEO said. 

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Raymond James Supportive Of Renovations

Family Dollar's underperformance versus peers began three years before it was bought out by Dollar Tree, Raymond James' Dan Wewer said in a research report.

Several initiatives have been put in place with no favorable result, the analyst said, adding that he's hopeful Dollar Tree has learned from two key mistakes: The everyday pricing at Family Dollar is a premium to rival Dollar General Corporation DG, and Family Dollar didn't use the "same financial rigor" in selecting its real estate as Dollar General and Dollar Tree.

Dollar Tree's guidance for renovating 1,000 Family Dollar stores in fiscal 2019 marks an increase from around 480 in fiscal 2018. The renovated stores are expected to achieve a comp sales lift above the original guidance of a mid-single digit gain, Wewer said.

In addition, 345 Family Dollar stores have been converted into Dollar Tree stores, with an additional 200 unites scheduled for 2019 —which should be seen as a "smart strategy," in his view. 

Raymond James maintains an Outperform rating on Dollar Tree with a price target lifted from $90 to $95.

Tigress: Sell Dollar Tree

Tigress Financial Partners' Ivan Feinseth said in his daily newsletter that investors should sell Dollar Tree's stock after Thursday's 6-percent gain on a "disappointing" earnings report. Same-store sales in Q3 fell short of expectations and management slashed its guidance once again, he said. 

Despite the Family Dollar unit showing positive gains in comps as a result of renovations, Feinseth said the company will "continue to struggle and make new lows," with downside potential to the high $70s.

Price Action

Dollar Tree shares were down 1.62 percent at $87 at the time of publication Friday. 

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Photo by M.O. Stevens/Wikimedia.