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Dollar Tree

Image result for dollar tree logo

Company Summary

Dollar Tree is a low end retail store selling products within the range of a dollar or less. They sell a wide variety of products from health and beauty to frozen foods. Dollar tree operates around 15,000 locations across the US and Canada. The company also operates Dollar Bills and Family Dollar, a multi-price-point variety chain.  

Key Financial Information

  • Market Cap: 20.26 Billion
  • Shares Outstanding: 237.9 million
  • Current Share value: 85.15%
  • YTD Return: -20.56%
  • P/E: 16.5
  • FY P/E: 15.54
  • EV/EBITDA: 9.85x
  • 5 Year Revenue Growth: 23.85%
  • Short Interest: 1.88%

Investment Thesis

Dollar Tree shares have experienced significant losses over the past 12 months, down 20.56% YTD. This is due to repeated misses on earnings expectations. Specifically sales estimates. This is likely due to the extremely high rate of employment and and recent wage growth experienced over the past two years.

With considerable income, employment and high consumer confidence, consumers are turning away from bargain price options such as Dollar Tree. This in favour of more expensive and higher end substitutes.

The high degree of economic strength is negatively affecting Dollar Tree stock prices. However in a market downturn, consumers with less money and lower confidence will turn to bargain value stores, like dollar tree.  

Currently the economy is at new heights, but stress signs are showing that a downturn is near. Canadian household debt recently exceeded 170% of household income, and with recent raise hikes and the promise of continue these hikes, the debt Canadian households hold is becoming more expensive. In the US Household Debt to GDP is around 77%, while at a much lower level than Canadians, raising rates will still continue to squeeze pockets. With less money to spend thanks to higher interest rates and large interest payments on debt consumers will be forced to return to dollar tree for their incredibly low prices.  

In short, Dollar Tree is currently undervalued due to a strong economy. In the likely event of an economic turnaround dollar tree will appreciate to its true value.     

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