Can the Rebound in Dollar Tree (DLTR) Stock Continue as Q3 Earnings Approach?

Dollar Tree (DLTR) stock has seen a rebound of 20% from its recent 52-week low of $60 per share, reached in early November. Many investors are now questioning whether this rally can be sustained as the company prepares to announce its Q3 earnings results on Wednesday, December 4.

Despite this recent increase, Dollar Tree’s stock is still trading at a significant 50% discount from its one-year high of over $150, which was recorded in March of this year. The upcoming Q3 report is expected to shed light on the company’s performance and its ability to maintain this upward trend.

However, recent results from other retailers, particularly the sharp decline in Target’s stock following disappointing Q3 results, might make investors cautious. This situation puts Dollar Tree under closer scrutiny from market watchers.

Expectations for Dollar Tree's Q3 Earnings

According to estimates from analysts, Dollar Tree is expected to report Q3 sales of around $7.45 billion, reflecting a 2% increase compared to the same quarter last year. In terms of earnings, expectations are set for a 10% increase, with projected earnings per share (EPS) at $1.07, up from $0.97 in the same quarter a year ago.

Nonetheless, Dollar Tree faced challenges earlier this year, having missed its Q2 earnings expectations by a notable 37%. The company reported an EPS of $0.67, in stark contrast to the Zacks Consensus estimate of $1.03. Furthermore, this figure represents a decline from the previous year’s EPS of $0.91. This struggle has been attributed to broader macroeconomic issues, including general liability claims which affected the company’s net income.

Additionally, there are concerns about the slower growth of Dollar Tree's subsidiary, Family Dollar. The company missed its Q2 sales estimates of $7.5 billion by 2%. Issues such as retail theft and inventory management have placed additional pressure on profitability, contributing to earnings miss in three of the last four quarters, resulting in an average EPS surprise of around -10.85%.

Assessing Dollar Tree's Potential for Recovery

Looking ahead, Dollar Tree's overall sales projections indicate that it will likely experience flat growth in its fiscal 2025, with expected sales of about $30.71 billion. Optimistically, sales are forecasted to increase by 4% in fiscal 2026, reaching approximately $31.97 billion.

Earnings forecasts suggest a decrease of 9% for fiscal 2025, but analysts anticipate a rebound, predicting an increase of 13% in fiscal 2026, with EPS forecasted at $6.04.

Valuation Comparison for Dollar Tree

The current valuation of Dollar Tree adds intrigue to its potential recovery. The stock is trading at a forward earnings multiple of 13.6X, which is quite low compared to the S&P 500 average of 25.5X. Additionally, Dollar Tree's valuation is below that of Target, which has a forward earnings multiple of 15.1X, and is significantly lower than the Zacks Retail-Discount Stores industry average of 21.2X.

Moreover, Dollar Tree shares are trading at just 0.5X sales, aligning closely with Target's figures and the broader industry average.

Conclusion for Investors

As Dollar Tree approaches its Q3 earnings announcement, it currently holds a Zacks Rank of #3 (Hold). Investing in Dollar Tree shares, which are near historical lows in terms of price-to-earnings (P/E) valuation, may seem appealing. However, the continuation of the recent rally in DLTR stock will likely hinge on the company's ability to meet or exceed Q3 expectations, as well as its guidance for future performance.

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