Dollar Tree climbs after Jefferies upgrades stock on improving traffic

Investing.com -- Jefferies upgraded Dollar Tree to Hold from Underperform, highlighting signs that traffic trends are inflecting positively and limited near-term risk of further share loss.

Analysts led by Corey Tarlowe said Dollar Tree’s business has returned to being "simple and straightforward." Jefferies’ prior downgrade had centered on operational complexity from the multi-price rollout, competitive pressure from peers, and concerns that ticket-driven growth would pressure traffic and margins. While some of those dynamics played out, the analysts said comps are currently strong and traffic data is inflecting positively.

Shares in discount store chain rose about 1% in U.S. premarket trading.

Traffic trends are improving even against tough comparisons, with second-quarter traffic growth the strongest in nine trailing quarters and potentially bottoming in the first quarter, according to Jefferies. The brokerage’s data shows Dollar Tree’s second-quarter rolling foot traffic at +1.4%, up from -0.8% in the first quarter, with July foot traffic at +4.5%.

Jefferies raised its second-quarter comp estimate for Dollar Tree to 3.4% from 2.5%. Using Placer’s rolling three-month visits data, the brokerage’s models point to roughly a 0.8% traffic comp, with an implied ticket comp of around 2.6% based on trailing four-quarter ticket stacks. The combined 3.4% estimate sits modestly above Street estimates of 3.1% and toward the high end of management’s 2.5%-3.5% guidance range.

The firm also raised its second-quarter EPS estimate to $1.15 from $1.00, above the Street’s $1.12.

Some competitive risk remains, the analysts said. While management has improved signage and pricing clarity, risk remains in bringing all 9,000 stores up to the company’s "G.O.L.D. Standard." The analysts also flagged a potential minor ticket headwind in the third quarter tied to a 40th-anniversary $1 rollout on select items, though they noted this could benefit traffic near-term.

In addition, Target has been regaining broader retail share recently, but analysts said they "do not expect further notable share loss from DLTR NT as pricing initiatives take hold and traffic returns."

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