On Thursday, Evercore ISI adjusted its outlook on Dollar Tree (NASDAQ:DLTR), reducing the price target to $144 from the previous $157, while maintaining an In Line rating for the retail chain's stock.
The firm highlighted several positive aspects of Dollar Tree's performance, including strong comparable store sales and customer traffic growth. The retailer reported a 6.3% increase in comparable store sales, a 7.1% rise in customer traffic, and gained 3.4 million new customers in 2023, indicating signs of a successful turnaround.
The analysis noted Dollar Tree's strategic actions, such as the closure of underperforming Family Dollar stores, which is expected to contribute to the company's financial health. The store closures, along with the introduction of multi-price point products, are seen as key factors in the company's ability to maintain relevance and increase market share.
The analyst anticipates approximately 100 basis points of margin improvement for the Dollar Tree segment, with expectations of nearing a 15% margin over the next two to three years, driven by gross margin improvements and stable selling, general, and administrative (SG&A) expenses.
Inventory management has also been a strong point for Dollar Tree, with a 6% year-over-year decline in inventory in the fourth quarter, which is anticipated to enhance efficiency further in 2024 as the company clears excess products related to store closures. The analysis also pointed out that free cash flow (FCF) increased by $200 million year-over-year, with a sustainable annual run rate of $500 to $600 million, even as capital expenditures (CapEx) are expected to rise.
The financial position of Dollar Tree remains solid, with about $700 million in cash and a leverage ratio of 2.4 times, providing ample capacity for stock buybacks with $1.35 billion still authorized for this purpose. The analyst projects that the combination of savings from reduced freight costs and store closures could contribute approximately $1 to earnings per share (EPS) in 2024, setting the stage for an underlying calendar year 2023 EPS of $5.80 (excluding the impact of a 53rd week and charges) to climb to $7.
Finally, the firm estimates that while some revenue recapture from the Family Dollar store closures is already included in Dollar Tree's guidance, there could be an additional $0.30 annualized boost to EPS. This could increase by 5-10 cents if Dollar Tree successfully retains Family Dollar's customers.
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