Bernstein Explores Dollar Tree (DLTR) Scenarios Amid Potential Family Dollar Sale

Bernstein SocGen Group analyst Zhihan Ma reiterated a Market Perform rating and $80.00 price target on Dollar Tree (NASDAQ: DLTR).

The analyst commented: "Eight months after Dollar Tree announced its plan to explore strategic alternatives for Family Dollar, we are (finally) getting signs that there are potential buyers. Reuters reported yesterday that Apollo Global Management, Sycamore Partners, and Brigade Capital Management are among potential bidders for Family Dollar (link). All declined to comment.

Sell Family Dollar scenario (32% upside): In our best case scenario, we estimate that DLTR could sell Family Dollar for ~$2.4B, assuming that the remaining Family Dollar stores will operate at a 4.5% EBIT margin (vs. LTM EBIT margin of 0.5%). This is assuming that DLTR could convince buyers of a potential turnaround at Family Dollar, which we view as unlikely.

Divest Family Dollar scenario (13% upside): Even if DLTR divests Family Dollar for free, we estimate an immediate ~13% EPS accretion.

Retain Family Dollar scenario (mid-to high-teens downside): If Dollar Tree doesn’t find a buyer for Family Dollar, the FDO segment could continue to drag enterprise-level profitability down and the noise around Family Dollar could be a distraction to the Dollar Tree business, where we see mid- to high-teen’s % downside.

There is also a chance that DLTR may need to pay to divest Family Dollar. In particular, we estimate that the Family Dollar banner carries ~$4B of outstanding lease liabilities. This presents a high hurdle for any potential buyer and may require DLTR to sweeten the deal."

For an analyst ratings summary and ratings history on Dollar Tree click here. For more ratings news on Dollar Tree click here.

Shares of Dollar Tree closed at $76.29 yesterday.

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