DLTR | Rate of Change Matters

There were two things we were looking for out of today’s DLTR print. 1) commitment to stay with the ‘break the buck’ test at DLTR, and 2) signs that store remodels are working at FDO. We got ‘em both. The company beat the quarter by $0.02 – though that’s not really what I care about. The fact is that Family Dollar is getting better on the margin – and rate of change matters. Did it match DG? No. But we saw FDO comp 2.4% -- accelerating to the highest level since 2013. That’s relevant to me since the market is currently valuing the Family Dollar asset to be virtually worthless. Seriously, if you give the Dollar Tree banner a DG multiple, FDO is valued at nearly zero with the stock at $98. The remodels are working, and the company stepped up the number of stores being upgraded. As for the ‘break the buck’ test at DLTR, my concern was that after one season management showed that it was a half-baked (i.e. built to fail) test simply to say that they tried. But they’re expanding the number of items in the store at holiday and they’re being sourced by Dollar Tree merchants – instead of just putting Family Dollar-sourced consumables on the shelf like it did on the first go-around. The stock gave back all its pre-market gains, and then some, which I find surprising as there was very little to poke holes in this quarter bear-side. I continue to believe that a successful price point expansion is worth $2-$3 per share over a TAIL duration, with a call option on a sustained recovery at FDO, which is worth another $2 per share. I’m not suggesting that the multiple is wrong here, but that the earnings are. Best Idea Long.