Dollar Tree (DLTR): We’re moving Dollar Tree to the #2 slot on our position Monitor – ahead of Chewy and behind Capri. While the stock was up 16% on the week, we got a major thesis validator out of the company in its decision to expand the Dollar Plus initiative (‘breaking the buck’, or moving to become a multi-price point retailer) to 500 stores from its current 100 store test, which gives us confidence that the company is pulling one of the biggest comp levers we see in retail today – and one that should double earnings as well as the stock. The reality is that the initiative is working, and management is seeing 2x the basket size in the Dollar Plus stores for people who buy at least one item from the expanded assortment – which is an impressive statistic. We think that the next move will be a 2,000-3,000 store roll out, which will be an intermediary step to a full roll out to Dollar Tree’s 7,741 stores. This will also be a catalyst for a more aggressive square footage growth story to emerge around the concept, as well as more ‘merchandise sharing’ with its ailing Family Dollar concept (where a turnaround is not even in our model, but gets us further upside to our 60% EPS beat over a TAIL duration). The chart below shows that breaking the buck should add ~$5.00 per share to EPS (on a ~$5.00 base) in the third year of its rollout. There’s simply no other upside to a model like that in retail today based on such an obvious strategic move. The consensus is doing the math all wrong here…Great opportunity to capture Alpha.
Nautilus (NLS): removing this one from our Long Bias list. We’ve had a nice ride with this one after adding it to the long side of our ledger at $6 (now at $19.23), and the reality is that the fundamental story is evolving to a point where sales are slowing on the margin, and the company is investing on the SG&A line in order to keep some semblance of top line momentum going in a post-pandemic world. We like the fact that its stepping on the gas to fuel future top line growth, but the one-two punch of sales slowing and costs accelerating is hardly a multiple expander – and the 18x p/e and 1x sales multiple is full for an exercise equipment maker that lacks the content ecosystem of players like Peloton. At current prices, if we want exposure to this category, we’d look to PTON over NLS.
