Dollar Tree Beats on Bottom Line

Dollar Tree Inc. (DLTR - Snapshot Report) reported robust results for the second quarter of fiscal 2012. The company’s quarterly earnings of 51 cents per share came in ahead of the Zacks Consensus Estimate of 47 cents. Moreover, it outperformed the year-ago earnings of 39 cents per share, registering an upside of 30.8% year over year. Higher sales and improved margins enabled Dollar Tree to post solid second-quarter results.

Quarterly Details

Dollar Tree's total revenue grew 10.5% in the quarter to $1,704.6 million from $1,542.4 million in the prior-year quarter. Higher sales were primarily driven by an improvement of 4.5% in comparable store sales over the prior-year period comps of 4.7%. However, total revenue was slightly below the Zacks Consensus Estimate of $1,711 million.

The company's quarterly gross profit climbed 10.5% year over year to $599.6 million, while gross margin remained flat at 35.2%. Operating income for the quarter grew 20.1% to $184.4 million. Operating margin came in at 10.8%, up 80 basis points from the year-ago period, primarily benefiting from a contraction in selling, general and administrative expenses as a percentage of sales.

Balance Sheet

Dollar Tree ended the second quarter with cash and cash equivalents of $379.8 million compared with cash balance of $421.6 million at the end of the prior-year quarter. The company had an outstanding long-term obligation of $250 million as of July 28, 2012. Merchandise inventories were up 9.6% year over year to $891.7 million. During the first six months of fiscal 2012, the company spent $140.1 million on capital expenditure.

Share Repurchase

During the quarter, the company bought back 1.6 million shares for about $80.9 million. At the quarter end, Dollar Tree had shares worth $1.1 billion remaining under its share buyback program.

Store Update

In the quarter under review, the company further expanded its stores network by opening about 77 stores, shutting down 5 stores and relocated 21 stores. This brings the company’s total store count to 4,523 in 48 states and 5 Canadian Provinces.

Looking Ahead

For the third quarter of fiscal 2012, Dollar Tree expects total sales in the range of $1.71 billion to $1.75 billion on the back of low to mid-single-digit same-store sales growth. Further, the company anticipates earnings in the range of 47 cents - 51 cents a share in the next/coming quarter.

For fiscal 2012, the company now anticipates sales to reach $7.36 billion - $7.45 billion range, driven by a low to mid-single-digit growth in same-store sales. The company projects earnings in the range of $2.45 - $2.54 per share for fiscal 2012.

Our Take

Dollar Tree is considered as one of the best-positioned dollar store concepts, especially with its evolving multi-price point chain. We believe that the company is doing a commendable job internally by managing controllable inputs, including reducing stem miles, while increasing back-haul opportunities.

The company continues to generate robust same-store sales growth, indicating its focus on low-priced wants and needs commodities. The rise in comparable sales is attributable to increased traffic, reflecting continued top-line growth.

Additionally, the company’s strong free cash flow generation signals an enhanced share buyback program, as the company, apart from stores growth, uses majority of the free cash flow to buyback shares.

Dollar Tree operates as a discount retailer of general merchandise in the southern, southwestern, midwestern, and eastern United States. The company is in direct competition with Dollar General Corporation (DG - Snapshot Report) and Family Dollar Stores Inc. (FDO - Analyst Report).

Currently, Dollar Tree has a Zacks #3 Rank, implying a short-term Hold rating on the stock. Moreover, the company retains a long-term ‘Neutral’ recommendation.