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Family Dollar is expanding its test of fresh produce and meat sales in 2021.
The discount chain, part of the Dollar Tree Inc. DLTR, -0.88% portfolio, began the test in late 2020 with produce and frozen meat, “targeting markets where shoppers have fewer local grocery options,” said Chief Executive Michael Witynski on the company’s fourth-quarter earnings call this week, according to a FactSet transcript.
The company is also trying a number of other merchandise categories, price points and store formats.
The rollout of Crafter’s Square was completed in all U.S. Dollar Tree stores in January. The art-and-crafts department builds on the existing offerings, and comes at a time when these items are experiencing increased demand during COVID-19.
On Thursday, Michaels Companies Inc. MIK, -1.09% reported better-than-expected profit and sales, one day after signing a $3.3 billion deal to be taken private.
Also on Thursday, JoAnn Inc. JOAN, , another crafting retailer, set its IPO terms.
U.S. online grocery forecast to exceed $100 billion for the first time in 2021
Dollar Tree, known for its wide variety of items priced at $1, is also expanding the rollout of Dollar Tree Plus in March, increasing the number of stores carrying merchandise at multiple prices. Currently in 120 stores, Dollar Tree Plus will extend to 500 locations. Many of the items are priced at $3 and $5.
And the company is adding to the number of combination Dollar Tree/Family Dollar locations around the country. The first combo store opened in 2019, followed by two in early 2020. There are currently nearly 50.
These stores are aimed at small towns and rural communities with populations of 3,000-to-4,000 people where shopping options are limited.
The company says that, compared with Family Dollar stores in small markets, the combo stores are seeing an average same-store sales growth of 20%.
“The combination stores are more productive, delivering higher gross margins and are better at leveraging store costs,” said Witynski. “Our goal is to have formats that leverage the best of Dollar Tree and Family Dollar brands to serve customers in all types of geographic markets.”
UBS analysts say Dollar Tree is poised to “eke out” a year of positive same-store sales despite difficult comparisons. UBS rates Dollar Tree stock a buy with a $130 price target.
“As Dollar Tree enters FY’21, we think it will be important for it to prove that its 2020 strength was due to more than just COVID,” wrote UBS analysts in a note. “We believe that its initiatives can help it do just that.”
Raymond James analysts say the combo stores could create a “niche” in the communities where they are located. And the economy may help drive business.
“[W]ith the potential for higher-than-normal unemployment for an extended period (more consumers trading down), the current environment could continue to benefit the Family Dollar turnaround efforts,” analysts said.
Raymond James rates Dollar Tree stock at market perform.
Target to spend $4 billion annually over the next several years to build on ‘record breaking’ 2020
BMO Capital Markets also rates Dollar Tree stock at market perform. Analysts led by Kelly Bania say they’re waiting for more information about the combo shops.
“While we can attest to the fun shopping experience at the new combination stores,
we lack clarity on the return profile of this new store format,” analysts said.
Moreover, there is concern about the optimism surrounding the EBIT potential for Family Dollar in 2021.
“Dollar Tree’s overall 2020 EBIT grew by $288 million, despite $279 million in COVID-19 costs, yet entirely driven by growth at Family Dollar. In 2021, we forecast a rebound in EBIT at Dollar Tree offset by a pullback in EBIT at Family Dollar as pandemic-induced sales revert to more normalized levels.”
BMO Capital Markets lowered its price target to $110 from $115.
Dollar Tree stock has fallen 9.2% over the past three months, but has gained 29.5% over the last year.
The S&P 500 index SPX, -1.20% is up 22.6% for the past 12 months.
