Dollar Tree (NASDAQ:DLTR) shares gained around 1% in U.S. pre-market trading after Jefferies upgraded the discount retailer to Hold from Underperform, citing improving customer traffic and a reduced risk of further market-share losses in the near term.
Analysts led by Corey Tarlowe said Dollar Tree’s operating story has returned to being “simple and straightforward.” Jefferies’ previous downgrade was based on concerns surrounding the complexity of the retailer’s multi-price strategy, pressure from competitors and the possibility that growth driven by higher average transaction values would weigh on traffic and margins.
While some of those concerns materialised, the brokerage now sees a more encouraging picture, with comparable sales remaining strong and customer traffic showing signs of improvement.
Store Traffic Shows Strongest Growth in Nine Quarters
Jefferies highlighted a notable recovery in visits to Dollar Tree stores, even against challenging year-earlier comparisons.
According to the firm, second-quarter traffic growth was the strongest recorded across the trailing nine quarters, suggesting customer visits may have reached a low point during the first quarter.
Jefferies’ data showed rolling second-quarter foot traffic increasing 1.4%, compared with a 0.8% decline during the first quarter. The improvement accelerated further in July, when foot traffic rose 4.5%.
The brokerage consequently increased its second-quarter comparable-sales forecast for Dollar Tree to 3.4% from 2.5%.
Using Placer’s rolling three-month store-visit data, Jefferies’ modelling suggests a traffic contribution of approximately 0.8%, combined with an implied ticket increase of around 2.6% based on trailing four-quarter trends.
That produces a 3.4% comparable-sales estimate, slightly above the Wall Street consensus of 3.1% and towards the upper end of Dollar Tree management’s guidance range of 2.5% to 3.5%.
Jefferies Raises Dollar Tree Earnings Forecast
Stronger sales expectations also prompted Jefferies to lift its second-quarter earnings estimate.
The firm now expects earnings per share of $1.15, up from its previous forecast of $1.00 and slightly ahead of the Wall Street consensus estimate of $1.12.
The improving outlook suggests Dollar Tree’s pricing initiatives and efforts to strengthen the customer experience are beginning to generate better results after a period of operational challenges.
Competitive Risks Have Not Disappeared
Jefferies nevertheless cautioned that Dollar Tree continues to face execution and competitive risks.
Management has made progress in improving store signage and making pricing easier for shoppers to understand, but Jefferies noted that bringing all 9,000 locations up to the company’s “G.O.L.D. Standard” remains a significant undertaking.
The analysts also identified a potential modest headwind to average transaction values during the third quarter from Dollar Tree’s 40th-anniversary promotion, which will return selected products to a $1 price point. However, the initiative could provide a short-term boost to customer traffic.
Meanwhile, Target has recently regained some broader retail market share. Even so, Jefferies analysts said they “do not expect further notable share loss from DLTR NT as pricing initiatives take hold and traffic returns.”
The upgrade reflects increasing confidence that Dollar Tree’s improving store traffic, stronger comparable-sales trends and clearer pricing strategy are reducing some of the downside risks that previously weighed on the stock.