Find better ways to utilize your dollars

Dollar Tree (NASDAQ:DLTR) stock, which has underperformed so far in 2024, should preferably move to the upside. However, considering the distribution company’s financial performance and major announcements, a short-term rebound appears unlikely.

Just because Dollar Tree sells discounted products doesn’t mean DLTR inventory is cheap. Keep in mind that Dollar Tree also owns the Family Dollar brand, which has influenced the company’s sales and profits for many years.

For what it’s worth, Dollar Tree remains profitable despite Family Dollar’s poor performance. Even amid rigid inflation and economic uncertainty, Dollar Tree will continue to generate significant profits through low-cost products.

But whether the company can engineer a turnaround and attract more investors is another story.

give up a bad investment

“Dollar Tree has been on a multi-year journey to help the company achieve its full potential,” said CEO Rick Dreiling in a recent company announcement.

Obviously, that “journey” could involve effectively abandoning the Family Dollar brand.

As a proud shoehorn myself, I can attest that there is a big difference between a Dollar Tree store and a Family Dollar store. No matter what city I’m in, when I see one of those green Dollar Tree store signs, I know exactly what I’m going to find inside. Each product is priced at $1.25 plus tax for a variety of products.

This is a completely different story from Family Dollar, but the prices of products vary, and unless it’s an emergency, I’ll just keep driving until I find a Dollar Tree store. I think some of my fellow bargain hunters are doing the same thing.

Just as I gave up on Family Dollar as a discount shopper, Dollar Tree may be giving up on the brand in the near future. Dollar Tree paid a hefty $8.9 billion for Family Dollar, but last year announced plans to close about 970 Family Dollar stores.

Dreiling attempted to spin this as a positive development, with Dollar Tree closing all Family Dollar stores to “focus on strengthening investments in the remaining Family Dollar stores, which offer favorable opportunities for long-term growth and transformation and offer more attractive returns.” “We are doing it,” he claimed. capital.”

That sounds good, but as always, investors will have to wait and see how the company fares. do Better than any management Called.

The company just said it had “begun a formal review of strategic alternatives” to Family Dollar. This “may include, among other things, a potential sale, spin-off or other disposition of the business.”

So the CEO’s positive thinking doesn’t pass the test of common sense. If Dollar Tree actually saw “favorable opportunities for long-term growth and transformation” and a “more attractive return on capital” with the Family Dollar brand, it would not consider selling all Family Dollar stores.

So, at least to me, it sounds like Dollar Tree is giving up on a bad investment.

A dull quarter from Dollar Tree

In other news, Dollar Tree just announced results for its first quarter of fiscal 2024, which ended May 4. Flailing DLTR stock really needed a positive catalyst, but there wasn’t much to get excited about in its quarterly results.

To summarize, the company’s net sales increased 4.2% year-over-year to $7.63 billion, in line with Wall Street’s consensus estimate. Meanwhile, Family Dollar’s same-store net sales increased just 0.1% year-over-year.

Ultimately, Dollar Tree reported adjusted earnings of $1.43 per share, down 2.7% from the previous year. Like Dollar Tree’s first quarter sales, these results were in line with analysts’ consensus forecasts.

Now is a good time to do a value check, using the good old price-to-earnings ratio (P/E) as a valuation metric.

I calculated that Dollar Tree’s EPS for the last four quarters was 91 cents + 97 cents + $2.55 + $1.43, or $5.86 total. If DLTR stock price is about $120, the retailer’s 12-month trailing P/E ratio would be $120/$5.86, or about 20.5.

That might sound like a low valuation, but the sector’s average P/E ratio is 17.64. So Dollar Tree stock isn’t necessarily an attractive trade based on outdated metrics.

Moreover, there’s no clear incentive to open a stock position in Dollar Tree as the company reports shabby quarterly results and appears ready to abandon Family Dollar altogether.