Dollar Tree (DLTR) is a rare retail company that actually offers a defensive play in case of a recession, given that people tend to look for discounts more when budgets tighten, explains Todd Shaver, editor of BullMarket.
Of course, a booming economy drives consumer activity across the board, and since that’s the world we live in, the outlook for Dollar Tree is strong either way. The status quo is our friend. If economic clouds gather, this is one of the bright spots.
The stock has had a terrible year, but that’s how it earned a place in our "Special Opportunities" portfolio in the first place. It hit $115 in January and now sits $30 below that. While it’s been no secret that the 2015 acquisition of rival discount chain Family Dollar has been a drag on the Dollar Tree brand, management has recognized the issue and is actively working to address the problem.
Operating trends at Family Dollar stores have improved and converting some to Dollar Tree outlets has helped. Still, revenue per store growth stands around 1.7% for the parent company while the new stores are tracking only 1.3% growth — and the conversion process is expensive.
Even so, margins are strong even on the “weak" side of the company. Family Dollar’s pricing and low-frills concept has ensured that 8% out of every dollar spent in its stores makes it to the bottom line. Remodeling has increased short-term costs but paid off with an immediate pickup in sales.
And the overall footprint keeps expanding. The number of stores in the primary Dollar Tree chain should grow with the economy to 10,000 over the next decade, which is good news because this is still the beating heart of the company. With 8000 stores on the Family Dollar side, the future is bright.
We’re here for the turnaround and to hedge our overall universe in the event the economy takes a downswing. Perhaps that’s why world-famous investor Carl Icahn took a stake in the company recently.
He’s predicting a rebound for Family Dollar one way or another, and he should know, having been a longtime backer of that company prior to the acquisition. If Carl Icahn is predicting good things on the horizon, who are we to disagree? We bought the dip $95. The recovery should hit our $120 target.
