Dollar Tree Inc. (DLTR Quick QuoteDLTR - Free Report) posted first-quarter fiscal 2017 results, wherein both the top line and bottom line improved year over year, and sales almost met our estimate. However, the company failed to meet the earnings estimates this time, after delivering back-to-back positive surprises in the last two quarters.  Further, management lowered its earnings outlook for fiscal 2017, while adjusting its sales view.

The company’s shares declined about 2% in the pre-market trading session following the announcement. Moreover, shares of Dollar Tree have slumped 11.6% in the past one year, underperforming the Zacks categorized Retail-Discount & Variety industry, which has showcased growth of nearly 2.4%.

Quarter in Detail

The company’s quarterly adjusted earnings of 98 cents per share jumped 10.1% year over year, though it fell a penny short of the Zacks Consensus Estimate of 99 cents. Nonetheless, earnings met the higher end of company’s guidance range of 91–98 cents per share.

Including one-time items like the receivable impairment charge associated with Dollar Express, the company’s earnings slumped 13.3% to 85 cents per share. Notably, Dollar Tree had divested stores to Dollar Express, as part of its efforts to gain FTC’s approval on its merger with Family Dollar. However, Dollar Express is currently on liquidation track, thus failing to repay Dollar Tree its receivables from the former. Consequently, Dollar Tree evaluated its divestiture-related receivables in the first quarter, which will be written down eventually, with its impairment charges being recorded in the income statement.

Consolidated net sales jumped 4% to $5,287.1 million in the quarter, almost meeting the Zacks Consensus Estimate of $5,293 million.

Comparable store sales (comps) for the quarter inched up 0.5%, backed by improved customer count and average ticket. While Dollar Tree banner posted comps growth of 2.5%, comps at the Family Dollar banner declined 1.2%.

The company’s quarterly gross profit advanced 4.7% year over year to $1,627 million, with the gross margin expanding 20 basis points (bps) to 30.8%. The margin enhancement was driven by reduced merchandise and freight expenses, somewhat negated by greater markdowns.

Selling, general and administrative expenses escalated 110 bps to 23.4% of sales, primarily due to impairment related charges, higher payroll and advertising costs, partly compensated by reduced depreciation.

Balance Sheet

Dollar Tree ended the quarter with cash and cash equivalents of $1,154.9 million, net merchandise inventories of $2,878.4 million, net long-term debt of $6,131.7 million and shareholders’ equity of $5,609 million.

Store Update

Dollar Tree opened 164 outlets, expanded or relocated 51 outlets, and shuttered 16 outlets during the quarter.

Looking Ahead

Management remains pleased with its quarterly performance, which witnessed improved margins and comps, with efficient cost management. Also, adjusted earnings met the higher end of the company’s predicted range, with sales coming near the mid-point of its projected band. Further, the company is progressing quite well with Family Dollar’s integration. The company further revealed that it is well on track with its expansion efforts for both Dollar Tree and Family Dollar, and is set to initiate renovation efforts for the latter in the second quarter.

However, the company trimmed its fiscal 2017 sales guidance, alongside curtailing its earnings forecast.

Management now forecasts net sales for fiscal 2017 (which will contain an additional week) in the band of $21.95–$22.25 billion, compared with the old projection of $21.94–$22.33 billion. The guidance stems from square footage growth, and comps improvement in the range of slightly positive to low single-digit rise  as compared with flat to low single-digit increase expected earlier.

Earnings per share for fiscal 2017 are now expected to be in the range of $4.17–$4.43, which includes an impairment charge of 13 cents recorded in the first quarter. Earlier, management projected earnings in a band of $4.20–$4.56 per share in fiscal 2017. The impact on sales and earnings from the 53rd week is included in management’s outlook. The current Zacks Consensus Estimate for fiscal 2017 is pegged at $4.48.

For the fiscal second quarter, consolidated sales are projected in the range of $5.18–$5.28 billion, driven by comps growth in a slightly positive to low single-digit rise range for the combined entity. Earnings are anticipated in the range of 80–88 cents per share. The current Zacks Consensus Estimate for the second quarter is pegged at 90 cents, thus hinting at downward revisions.

Zacks Rank & Stocks to Consider

Dollar Tree currently carries a Zacks Rank #3 (Hold).

Investors may consider some better-ranked stocks such as Best Buy Co., Inc. (BBY Quick QuoteBBY - Free Report) , Burlington Stores, Inc. (BURL Quick QuoteBURL - Free Report) and Ulta Beauty, Inc. (ULTA Quick QuoteULTA - Free Report) , each of them carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Best Buy delivered an average positive earnings surprise of 27.7% over the trailing four quarters and has a long-term earnings growth rate of 10.8%.

Burlington Stores delivered an average positive earnings surprise of 26.3% over the trailing four quarters and has a long-term earnings growth rate of 15.9%.

Ulta Beauty Stores delivered an average positive earnings surprise of 5.7% over the trailing four quarters and has a long-term earnings growth rate of 19.5%.

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