On Thursday, Deutsche Bank adjusted its outlook on Dollar Tree (NASDAQ:DLTR) shares, reducing the price target to $155 from the previous $166. The firm maintained a Buy rating on the stock despite recent challenges faced by the company.
The analyst noted a series of points regarding Dollar Tree's performance and projections: a mixed fourth quarter with some financial complications, a first-quarter guidance that fell short of consensus expectations, and an updated 2024 outlook that aligns with current market estimates.
Management at Dollar Tree has withdrawn their commitment to achieving a $10 earnings per share (EPS) by 2026, citing macroeconomic factors. The analyst pointed out that issues such as shrinkage, negative product mix, consumer dynamics, and various elements in the profit and loss statement could delay the achievement of this EPS target.
Despite these setbacks and a significant 14% drop in share price, the analyst believes the market reaction is exaggerated and sees this as a buying opportunity.
Dollar Tree's core business is reported to be performing well, with strong traffic and better-than-expected results from the introduction of multi-priced items. While the turnaround at Family Dollar is progressing more slowly, with approximately 600 store closures anticipated to contribute around $0.15 to EPS in the second half of 2024 and about $0.30 on an annual run rate.
These closures are expected to eliminate stores that are underperforming, averaging a loss of $140,000 each year, which should help Family Dollar break even in 2024 and become modestly profitable by 2025.
Looking forward, the analyst sees potential margin drivers in 2025 and 2026, suggesting that the projected 15%-20% multi-year EPS compound annual growth rate (CAGR) remains largely intact. With current valuations, the risk/reward profile is deemed favorable, with a potential range between $120 at 15 times the projected $7.75 EPS for 2025 and $160 at 19 times the projected $8.40 EPS for the same year.
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