Long-established in the Retail - Defensive industry, Dollar Tree Inc (DLTR, Financial) has enjoyed a stellar reputation. It has recently witnessed a daily gain of 3.44%, juxtaposed with a three-month change of -25.05%. However, fresh insights from the GF Score hint at potential headwinds. Notably, its diminished rankings in financial strength, growth, and valuation suggest that the company might not live up to its historical performance. Join us as we dive deep into these pivotal metrics to unravel the evolving narrative of Dollar Tree Inc.
What Is the GF Score?
The GF Score is a stock performance ranking system developed by GuruFocus using five aspects of valuation, which has been found to be closely correlated to the long-term performances of stocks by backtesting from 2006 to 2021. The stocks with a higher GF Score generally generate higher returns than those with a lower GF Score. Therefore, when picking stocks, investors should invest in companies with high GF Scores. The GF Score ranges from 0 to 100, with 100 as the highest rank.
- Financial strength rank: 5/10
- Profitability rank: 7/10
- Growth rank: 4/10
- GF Value rank: 4/10
- Momentum rank: 1/10
Based on the above method, GuruFocus assigned Dollar Tree Inc the GF Score of 64 out of 100, which signals poor future outperformance potential.
Understanding Dollar Tree Inc Business
Dollar Tree Inc operates discount stores across the United States and Canada, with over 8,600 shops under its namesake banner and nearly 7,800 under Family Dollar. About 47% of Dollar Tree's sales in fiscal 2023 were composed of consumables (including food, health and beauty, and cleaning products), around 45% from variety items (including toys and homewares), and over 5% from seasonal items. The Dollar Tree banner sells most of its merchandise at the $1.25 price point and positions its stores in well-populated suburban markets. Conversely, Family Dollar primarily sells consumable merchandise (80% of the banner's sales) at prices below $10. About two-thirds of Family Dollar's stores are located in urban and suburban markets, with the remaining one-third located in rural areas.
Financial Strength Breakdown
Dollar Tree Inc's financial strength indicators present some concerning insights about the company's balance sheet health. Dollar Tree Inc has an interest coverage ratio of 0.94, which positions it worse than 95.55% of 247 companies in the Retail - Defensive industry. This ratio highlights potential challenges the company might face when handling its interest expenses on outstanding debt. It's worth noting that the esteemed investor Benjamin Graham typically favored companies with an interest coverage ratio of at least five.
The company's Altman Z-Score is just 2.3, which is below the safe threshold of 2.99. Although this does not imply immediate danger of financial distress, the stock may face some financial struggles if the Altman Z-score drops below 1.81. Additionally, the company's low cash-to-debt ratio at 0.05 indicates a struggle in handling existing debt levels.
Growth Prospects
A lack of significant growth is another area where Dollar Tree Inc seems to falter, as evidenced by the company's low Growth rank. Lastly, Dollar Tree Inc predictability rank is just one star out of five, adding to investor uncertainty regarding revenue and earnings consistency.
Conclusion
In conclusion, Dollar Tree Inc's financial strength, profitability, and growth metrics, as highlighted by the GF Score, suggest potential underperformance. The company's low interest coverage ratio, Altman Z-Score, and cash-to-debt ratio indicate financial vulnerabilities. Additionally, the low growth and predictability ranks further underscore the challenges Dollar Tree Inc faces in maintaining its historical performance. Investors should carefully consider these factors when evaluating the company's future prospects. For those seeking companies with strong GF Scores, GuruFocus Premium members can explore more options using the following screener link: GF Score Screen.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
