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Dollar Tree Balance Sheet Less Promising

Guilfoyle sees plenty of overbought indicators for discount retailer.

Dollar Tree’s  (DLTR) - Get Dollar Tree, Inc. Report balance sheet looks less than promising as the company’s profit margin shrank during the third quarter, argues Real Money Pro’s Stephen 'Sarge' Guilfoyle.

The retailer that touts itself for selling consumer items for only a dollar is now moving to raise base prices to $1.25. The national retailer has already started selling items at the higher price level and plans to implement it in all stores nationwide by the end of first quarter fiscal 2022.

Investors should take a longer view, he wrote in a recent Real Money Pro column.

“The balance sheet is not exactly weak, but just understand that even with long-term debt roughly even with where it entered the year, and with the cash balance down, it puts the company in a less enviable situation,” Guilfoyle wrote. “Now, the current ratio is still plenty strong, but if we were to do a quick ratio for Dollar Tree, which I generally do not do for bricks-and-mortar retailers, with elevated inventories, it might not look so hot.”

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The retailer reported GAAP earnings of $0.96 per share based on $6.42 billion in revenue. The earnings were a decline of 31% year-over-year and beat Wall Street’s estimates by one penny, but sales rose by 3.9% year-over-year and were in line with expectations.

“Needless to say, when revenues grow, and profits crash, there must be margin compression,” he wrote. “The cost of sales increased a whopping 9.4% annually, body slamming gross margin down to 27.5% from 31.2%. The company blamed higher freight costs, which were partially offset by improved inventory shrink.”

Activist investor Mantle Ridge now owns a $1.8 billion or 7% stake in the retailer and started buying shares on Sept. 15. The retailer revealed its strategy to sell higher priced items of $1.25 to even $5 shortly after.

Technical indicators such as Relative Strength, the Full Stochastics Oscillator and the daily Moving Average Convergence Diveregence (MACD) are ”all screaming overbought" at the tops of their little lungs,” Guilfoyle wrote.

“I would rather short the name, or at least take some kind of short-term bearish stance that will not expose me to too much pain should I be wrong,” Guilfoyle wrote.

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