Dollar Tree Inc (NASDAQ: DLTR) is inching up this morning after confirming the sale of “Family Dollar” that has long been a burden on its overall financials.
The discount retailer reported a wider-than-expected loss for its fiscal Q4 today, but investors are focusing more on the Family Dollar news.
“It’s absolutely what every investor could possibly have wanted,” according to Karen Short, head of consumer research at Melius.
Dollar Tree stock is currently down about 10% versus its year-to-date high.
Family Dollar was a burden for DLTR financials
Brigade Capital and Macellum Capital have agreed to take over Family Dollar for just over $1.0 billion, which is significant capital that Dollar Tree could put to use in pursuit of future growth.
Plus, since the Family Dollar stores weren’t really profitable, unloading the chain could actually result in upward revisions on earnings.
According to Karen Short, the Family Dollar sale is significant for DLTR since “fears were they’d have to close all stores or they’d have to pay to have someone take the stores.”
That would have resulted in significant financial burden for Dollar Tree. Note that FD weakness has already slashed DLTR shares into half over the past 12 months.
Dollar Tree’s balance sheet and ROIC to improve
Short called the $1.0 billion deal that Dollar Tree announced with the two asset managers today a “miracle” in her interview with CNBC on Wednesday.
Investors are cheering the news because getting rid of Family Dollar will improve both balance sheet and return on invested capital (ROIC) tied to DLTR, she added.
Dollar Tree banner has always been a very high ROIC business and has always been a very steady performer as it related to operating margins. So, it’s absolutely a win-win.
Additionally, the Melius’ expert is confident that Dollar Tree’s consumer is doing fairly well amidst the recently brewing fears of a recession ahead.
Should you buy Dollar Tree stock today?
It’s worth mentioning that Dollar Tree could benefit if the US economy does indeed slide into a recession since challenging times tend to make consumers more price-sensitive.
For the full year, the chain of discount retail stores guided for up to $19.1 billion in sales from continuing operations on Wednesday. Adjusted earnings on a per-share basis are seen falling between $5 and $5.5 in fiscal 2025.
“With the sale of Family Dollar set to close later this year, we’ll be able to fully dedicate ourselves to Dollar Tree’s long-term growth, profitability and returns on capital,” said Mike Creedon, the company’s chief executive in a press release today.
Note that Wall Street currently sees upside in DLTR stock to $80 on average that indicates potential upside of about 15% from current levels.
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