Wednesday, Credit Suisse initiated coverage of Dollar Tree Inc. (DLTR) stock with a Neutral rating and a price target of $54.
Analyst Roller noted that driven by strong square footage growth and traffic trends as customers seek value and convenience, Dollar Tree's sales are outpacing those of its direct competitors and retail in general. However, the analyst believes the company faces several company-specific and macro headwinds in 2010.
The analyst believes DLTR stands to benefit the most of the dollar stores from a more favorable real estate environment, as its rental expense makes up a greater percent of fixed expenses. Should Dollar Tree reduce its average rent per square foot on new or renegotiated leases by 10% in 2010, the analyst estimates a $0.06 benefit to EPS.
The analyst noted that as Dollar Tree adds coolers/freezers to its stores, its increase in mix of food should continue, requiring extra in-store labor and pressuring margins due to mix shift. Food sold exclusively at the $1 price point might not provide enough boost to the average ticket to leverage these added expenses.
Fixed at the $1 price point, Dollar Tree is benefiting from deflation in food and consumables with increased initial markup driving gross margin improvement. Later in 2010, the analyst anticipates a return to inflation. This could present a particular challenge for Dollar Tree.
Currently, DLTR is up $0.11 or 0.23% and trading at $48.54.
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