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        Dollar Tree is one of the best defensive names in the marketplace, but its current valuation needs to moderate before we re-enter the name

        Dollar Tree,$Dollar Tree(DLTR.US)$ a prominent discount retail chain, recently reported earnings that showed strong traffic at both Dollar Tree and Family Dollar outlets, with both seeing mid-single digit increases. Despite these promising indicators, the company's gross margin of 30.5% fell 80 basis points below consensus. This drop was primarily driven by increased shrink, price and wage investments, and a negative shift in sales mix towards lower-margin consumables.
        Furthermore, Dollar Tree revised its full-year EPS outlook downwards by 9% at the midpoint, reflecting an 11% drop from the current consensus. Its second-quarter EPS outlook was 32% below consensus at the midpoint, indicating potential financial difficulties. These revisions suggest a challenging fiscal year 2024 for the company due to changing consumer behaviors and substantial investments in capital expenditures and operating expenses. The company has also been facing several near-term challenges, such as product cost pressure due to food inflation, higher operational costs, and merchandising difficulties as they expand multi-price points. Furthermore, declining SNAP benefits add to the difficulties. We believe DLTR's current valuation is not perceived as attractive, trading at approximately 19x FY25 consensus EPS.
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