The Concern For Dollar Tree Isn't Amazon, It's Family Dollar

Bernstein said in a note Thursday the concern regarding Dollar Tree, Inc. (NASDAQ: DLTR) isn't Amazon.com, Inc. (NASDAQ: AMZN) but its own Family Dollar Stores.

Like The Dollar Stores

Analyst Brandon Fletcher clarified that he generally likes the dollar stores, as he views these stores as defensible from Amazon with compelling growth even after the Whole Foods Market, Inc. (NASDAQ: WFM) deal.

Family Dollar Turnaround A Long Shot

However, the analyst said he remains concerned about the Family Dollar banner of Dollar Tree and high expectations of a near-term fix (see Fletcher's track record).

Although conceding that KKR brought about a dramatic improvement in Family Dollar, Bernstein said it continues to think a turnaround at Family Dollar would be more difficult, more attenuated and more resource intensive, given that the synergies were limited.

The firm thinks the price at which Family Dollar becomes a free option is getting closer. That said, the firm said it would want to see evidence of a new Family Dollar before it can see a new path for Dollar Tree.

While believing that the sell-off in the dollar store space is overdone, the firm said the Dollar Tree slide is orchestrated by three main factors:

1. Family Dollar turnaround not delivering on investor expectations, primarily on comps.
2. Family Dollar becoming vulnerable in the wake of intensifying urban/suburban competition following the Amazon/Whole Foods deal.
3. Impatient investors selling the shares to invest in other profitable opportunities.

"We continue to like Dollar Stores in an AMZN/WFM world but believe mediocre retail concepts will struggle if subscale and more suburban/urban," the firm said.

"We think things get worse before they get better for Family Dollar from Aldi & Wal-Mart Stores Inc (NYSE: WMT) long before AMZN matters."

Bernstein rates Dollar Tree an Underperform, with a $65 price target.

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Image Credit: By Bart Everson - Flickr: Family Dollar, CC BY 2.0, via Wikimedia Commons