Here's Why Dollar Tree Should Emerge Stronger After This Acquisition Battle

| About: Dollar Tree, (DLTR)


Dollar Tree's acquisition of Family Dollar looks likely after the latter rejected a bid from Dollar General.

Dollar Tree is already delivering good growth and is executing smart strategies to propel same-store sales, even though its last quarter's results suffered due to acquisition costs.

Dollar Tree's bottom line is expected to increase at a good pace in the next five years, and the Family Dollar acquisition should amplify its growth.

Dollar stores have been in the news in recent times as the trio of Dollar Tree (NASDAQ:DLTR), Dollar General (NYSE:DG), and Family Dollar (NYSE:FDO) have been engaged in an acquisition battle. Dollar Tree wants to acquire Family Dollar, but so does Dollar General. However, Family Dollar is leaning toward Dollar Tree, and recently rejected a Dollar General bid.

In the midst of this fight, Dollar Tree reported a mixed set of numbers for the second quarter on account of acquisition costs related to Family Dollar. Its sales were better than expectations, but profit failed to satisfy consensus expectations as the company confirmed its decision to buy Family Dollar.

In addition, Dollar Tree has even reduced its outlook for the year. But, the company has strong fundamentals, and once it completes the acquisition of Family Dollar, it will be better-positioned for growth. The company's results are already strong, as its net sales during the previous quarter increased 9.5% to $2.03 billion from the year-ago period, along with a 4.5% rise in its comparable store sales.

Going forward, the company marginally lowered its outlook on earnings and revenue compared to its previous guidance. Dollar Tree expects earnings of $2.94 to $3.06 per share on revenue of $8.44 billion to $8.55 billion. But, since Family Dollar is leaning toward Dollar Tree in the acquisition saga, as an acquisition by Dollar General will give rise to anti-trust issues, Dollar Tree can expect to finally acquire Family Dollar

Family Dollar will add strength to existing strategies

This move is expected to yield good returns in the future. Management has identified two main strategies by which it can grow its business, which comprise of opening new stores, increasing the productivity of all stores by developing new formats, new markets, and new channels as growth vehicles. In line with this strategy, it opened ninety new stores during the previous quarter and expanded twenty existing ones.

Currently, it has a store count of 5,166, and aims to increase this further by end of the year. The acquisition of Family Dollar will add more than 8,100 stores to its existing count, and enable Dollar Tree to increase its footprint by a big margin.

Dollar Tree's second strategy is to increase productivity of all stores, which it plans to achieve through category expansion. Consequently, it has expanded its assortments in pet supplies, hardware, health, beauty, and eyewear. According to Dollar Tree, "Our category expansions in pet supplies, hardware, household supplies, food, electronics and party are producing company leading results and comp sales increases."

Impressive moves

It has also launched various campaigns like Stretch Your Dollar and See What $20 Buys. Along with this, Dollar Tree continues to expand its frozen and refrigerated category, even though it has lower margins. But, the company made a right choice as these are fast moving goods, and should see increased shopping frequency.

Dollar Tree is also expanding its brands, Deal$ and Dollar Tree Canada, which will allow the company to increase its reach into more markets. It has now managed to increase the Deal$ store count to 216, while Dollar Tree Canada stands at 196. Management sees robust potential in the Canadian market, and expects to increase the store count to 1,000 in the coming years.

In addition, Dollar Tree has launched new websites called Extreme Values and New Arrivals. This has extended the company's access to more customers by enabling online shopping for bonus buys, deals on manufacturers close outs, and new arrivals.

Valuation and final words

Although Dollar Tree's second-quarter numbers were not up to the mark and earnings were below expectations, this was mainly due to the impending acquisition of Family Dollar, which might prove to be a good investment from a long-term perspective.

From a valuation point of view as well, Dollar Tree looks well-placed. It has a trailing P/E of 19, and its forward P/E looks impressive at 15, reflecting earnings growth. Without the inclusion of Family Dollar, Dollar Tree's earnings are expected to improve at an impressive CAGR of 15.5% in the next five years. The company is focusing on several growth initiatives, it is launching new campaigns, and opening more stores. Considering all these factors, investors should consider Dollar Tree for the long run.

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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.