Dollar Tree Could Hit 'Home Run' By Charging Over $1, Analyst Says

Shares of Dollar Tree (DLTR) are in focus after a Wells Fargo analyst said the company could unlock value by changing its pricing strategy.

'MEANINGFUL APPRECIATION': Wells Fargo analyst Edward Kelly believes Dollar Tree has "significant opportunity to unlock value" by expanding price points beyond one dollar. He sees three reasons this catalyst could arrive sooner than expected: rising freight and wage costs, potential trade issues, and his belief that the "moment of truth is here" for the Family Dollar brand, which the company also owns. Kelly said freight costs could easily continue to rise and Dollar Tree's model appears to carry outsized risk as freight is about double the retail average. In addition, the company may need to invest more in labor given its starting rate is still under $11 per hour on average. The analyst estimates the issues could impact core earnings by another 10%-15% over time. Kelly also said Dollar Tree could face greater difficulty in offsetting cost inflation as any trade issue would pressure the process since 40% of product are imported. Additionally, the analyst said the company is coming up on completion of its third year with Family Dollar, which accounts for roughly half of Dollar Tree, and if comp does not improve, management will likely look for other sources of growth. Kelly said by adding higher prices the company could alleviate cost pressure, enable more merchandising creativity, extend new store runway and drive improved comps, margins, and growth. The stock could see "meaningful appreciation" from the change in price strategy, Kelly said, adding he would not be surprised to see this happen in the next few years. He keeps an Outperform rating on the shares with a $112 price target.

PRICE ACTION: Dollar Tree is down 0.8%, or 72c, to $93.57 in morning trading.

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Gary Anderson 1 year ago Contributor's comment

Only 40 percent of merchandise is imports? That seems like a low number. What would they call it, the buck and a quarter store?