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Dollar Tree (DLTR) Slips on Q3 Earnings Miss, Narrowed View
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Dollar Tree, Inc. (DLTR - Free Report) has reported third-quarter fiscal 2023 results, wherein earnings and sales missed the Zacks Consensus Estimate. The top line improved year over year, while earnings declined. Sales growth resulted from gains across both segments, higher traffic and robust market share gains. However, the bottom line was impacted by an unfavorable sales mix, higher shrink, product cost inflation, a product recall, and wage investments in distribution center payroll.
The company narrowed its guidance for fiscal 2023 on softer demand from low-income households, persistent increase in shrink and sales mix headwinds throughout fiscal 2023.
Shares of DLTR declined 2.2% in the pre-market trading session on Nov 29, driven by the soft third-quarter results and a narrowed fiscal 2023 outlook on muted consumer spending trends and elevated shrink. The Zacks Rank #3 (Hold) stock has declined 6.7% in the past three months against the industry’s growth of 3.2%.
Image Source: Zacks Investment Research
Quarter in Detail
Dollar Tree’s earnings declined 19.2% year over year to 97 cents per share. Earnings also missed the Zacks Consensus Estimate of $1.01. Earnings per share included costs related to a voluntary retail-level product recall in Family Dollar stores of 5 cents per share.
Consolidated net sales advanced 5.4% year over year to $7,314.8 million but missed the Zacks Consensus Estimate of $7,401 million. Enterprise same-store sales (comps) improved 3.9% year over year. The company’s comps benefited from a 4.7% rise in traffic, partly negated by a 0.8% decline in average ticket.
For the Dollar Tree banner, comps were up 5.4%, while the same for the Family Dollar banner improved 2%. The Dollar Tree segment benefited from a 7% increase in traffic, which was somewhat offset by a 1.5% decline in average ticket. Comps at Family Dollar were aided by a 1.4% increase in traffic, offset by a 0.7% decline in average ticket.
We anticipated enterprise comps to increase 4.7% in the fiscal third quarter. Our model predicted comps growth of 5.2% for the Dollar Tree banner and 4.3% for Family Dollar.
Dollar Tree, Inc. Price, Consensus and EPS Surprise
The gross profit rose 4.9% year over year to $2,173 million, while the gross margin contracted 20 basis points (bps) to 29.7%. We estimated a rise of 11.7% in gross profit and a 140-bps expansion in the gross margin. An unfavorable sales mix, higher shrink, product cost inflation, a product recall and wage investments in distribution center payroll affected the gross margin. This was partly negated by lower freight costs. The gross margin contracted 60 bps to 34.8% at the Dollar Tree banner and expanded 20 bps to 23.6% at the Family Dollar segment.
Selling, general and administrative (SG&A) expenses, as a percentage of sales, increased 130 bps to 25.7%. The increase was mainly driven by labor investments in stores and field payroll, rising information technology system costs, investments in repairs and maintenance, higher depreciation and amortization, and increased utility expenses. This was partially offset by sales leverage.
As a percentage of sales, we expected SG&A expenses to increase 270 basis points to 27.1% in the fiscal third quarter. In dollar terms, SG&A expenses were anticipated to increase 18.2% year over year.
Operating income declined 20.9% to $301.7 million. The operating margin moved down 140 bps to 4.1%. We had estimated a decline of 17.4% in adjusted operating income and a 120-bps contraction in the adjusted operating margin. Segment-wise, the operating margin declined 120 bps to 12.1% for Dollar Tree. The Family Dollar segment reported an operating loss of $66.3 million, wider than the loss of $18.4 million reported in the year-ago quarter.
Balance Sheet
Dollar Tree ended the fiscal third quarter with cash and cash equivalents of $444.6 million. As of Oct 28, 2023, net merchandise inventories decreased to $5,515.1 million from $5,657.7 million in the year-ago period. It had net long-term debt of $3,425.1 million and shareholders’ equity of $8,998.2 million as of Oct 28, 2023.
The company bought back 2,176,886 shares for $252.3 million in third-quarter fiscal 2023. As of Oct 28, 2023, Dollar Tree had $1.35 billion remaining under its existing authorization.
Store Update
In third-quarter fiscal 2023, the company opened 197, re-bannered eight and closed 43 stores. It opened 107 Dollar Tree stores and 90 Family Dollar outlets. In the quarter, DLTR closed 13 Dollar Tree and 30 Family Dollar stores. As of Oct 28, 2023, DLTR operated 16,622 stores in 48 states and five Canada provinces.
The company announced a comprehensive review of its Family Dollar portfolio to identify stores that are not aligned with its transformative vision.
Guidance
DLTR has narrowed its sales and EPS guidance range for fiscal 2023. The company’s guidance incorporates the effects of the continued momentum in the Dollar Tree banner, incremental freight savings, softer demand from low-income households, and a continuation of the shrink and sales mix headwinds throughout fiscal 2023. It excludes any potential impacts from the strategic review of the Family Dollar portfolio.
For fiscal 2023, Dollar Tree expects consolidated net sales of $30.5-$30.7 billion compared with the prior mentioned $30.6-$30.9 billion. The company anticipates mid-single-digit comps growth. Comps are likely to increase in the mid-single digits in the Dollar Tree banner and in the low-single digits in the Family Dollar segment. Previously, the company expected mid-single-digit comps growth at both Dollar Tree and Family Dollar segments. Selling square footage is expected to rise 3-3.5% for fiscal 2023.
Management expects earnings per share (EPS) of $5.81-$6.01 (including a 12-cent charge for the legal reserve incurred in the fiscal first quarter and gains from the 53rd week in fiscal 2023) compared with the prior stated $5.78-$6.08 for fiscal 2023.
For fourth-quarter fiscal 2023, the company expects consolidated net sales of $8.6-$8.8 billion based on low-single-digit comps growth for the enterprise. Comps are expected to improve in the mid-single digits at the Dollar Tree banner. Meanwhile, comps for the Family Dollar banner are likely to be between a decline of 1% and an increase of 1%. EPS is estimated to be $2.58-$2.78 for the fiscal fourth quarter.
The Zacks Consensus Estimate for TGT’s fiscal 2023 sales indicates 1.4% growth from the year-ago reported level. The company has a trailing four-quarter earnings surprise of 24.2%, on average.
Abercrombie, a specialty retailer of premium, high-quality casual apparel for men, women, and kids, currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for Abercrombie’s current fiscal-year sales suggests growth of 12.3% from the year-ago reported number. ANF has a trailing four-quarter earnings surprise of 713%, on average.
American Eagle, a specialty retailer of casual apparel, accessories and footwear for men and women, currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for American Eagle’s current financial-year sales and earnings suggests growth of 3.7% and 37.1%, respectively, from the year-ago period’s actuals. AEO has a trailing four-quarter earnings surprise of 23%, on average.
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Dollar Tree (DLTR) Slips on Q3 Earnings Miss, Narrowed View
Dollar Tree, Inc. (DLTR - Free Report) has reported third-quarter fiscal 2023 results, wherein earnings and sales missed the Zacks Consensus Estimate. The top line improved year over year, while earnings declined. Sales growth resulted from gains across both segments, higher traffic and robust market share gains. However, the bottom line was impacted by an unfavorable sales mix, higher shrink, product cost inflation, a product recall, and wage investments in distribution center payroll.
The company narrowed its guidance for fiscal 2023 on softer demand from low-income households, persistent increase in shrink and sales mix headwinds throughout fiscal 2023.
Shares of DLTR declined 2.2% in the pre-market trading session on Nov 29, driven by the soft third-quarter results and a narrowed fiscal 2023 outlook on muted consumer spending trends and elevated shrink. The Zacks Rank #3 (Hold) stock has declined 6.7% in the past three months against the industry’s growth of 3.2%.
Image Source: Zacks Investment Research
Quarter in Detail
Dollar Tree’s earnings declined 19.2% year over year to 97 cents per share. Earnings also missed the Zacks Consensus Estimate of $1.01. Earnings per share included costs related to a voluntary retail-level product recall in Family Dollar stores of 5 cents per share.
Consolidated net sales advanced 5.4% year over year to $7,314.8 million but missed the Zacks Consensus Estimate of $7,401 million. Enterprise same-store sales (comps) improved 3.9% year over year. The company’s comps benefited from a 4.7% rise in traffic, partly negated by a 0.8% decline in average ticket.
For the Dollar Tree banner, comps were up 5.4%, while the same for the Family Dollar banner improved 2%. The Dollar Tree segment benefited from a 7% increase in traffic, which was somewhat offset by a 1.5% decline in average ticket. Comps at Family Dollar were aided by a 1.4% increase in traffic, offset by a 0.7% decline in average ticket.
We anticipated enterprise comps to increase 4.7% in the fiscal third quarter. Our model predicted comps growth of 5.2% for the Dollar Tree banner and 4.3% for Family Dollar.
Dollar Tree, Inc. Price, Consensus and EPS Surprise
Dollar Tree, Inc. price-consensus-eps-surprise-chart | Dollar Tree, Inc. Quote
The gross profit rose 4.9% year over year to $2,173 million, while the gross margin contracted 20 basis points (bps) to 29.7%. We estimated a rise of 11.7% in gross profit and a 140-bps expansion in the gross margin. An unfavorable sales mix, higher shrink, product cost inflation, a product recall and wage investments in distribution center payroll affected the gross margin. This was partly negated by lower freight costs. The gross margin contracted 60 bps to 34.8% at the Dollar Tree banner and expanded 20 bps to 23.6% at the Family Dollar segment.
Selling, general and administrative (SG&A) expenses, as a percentage of sales, increased 130 bps to 25.7%. The increase was mainly driven by labor investments in stores and field payroll, rising information technology system costs, investments in repairs and maintenance, higher depreciation and amortization, and increased utility expenses. This was partially offset by sales leverage.
As a percentage of sales, we expected SG&A expenses to increase 270 basis points to 27.1% in the fiscal third quarter. In dollar terms, SG&A expenses were anticipated to increase 18.2% year over year.
Operating income declined 20.9% to $301.7 million. The operating margin moved down 140 bps to 4.1%. We had estimated a decline of 17.4% in adjusted operating income and a 120-bps contraction in the adjusted operating margin. Segment-wise, the operating margin declined 120 bps to 12.1% for Dollar Tree. The Family Dollar segment reported an operating loss of $66.3 million, wider than the loss of $18.4 million reported in the year-ago quarter.
Balance Sheet
Dollar Tree ended the fiscal third quarter with cash and cash equivalents of $444.6 million. As of Oct 28, 2023, net merchandise inventories decreased to $5,515.1 million from $5,657.7 million in the year-ago period. It had net long-term debt of $3,425.1 million and shareholders’ equity of $8,998.2 million as of Oct 28, 2023.
The company bought back 2,176,886 shares for $252.3 million in third-quarter fiscal 2023. As of Oct 28, 2023, Dollar Tree had $1.35 billion remaining under its existing authorization.
Store Update
In third-quarter fiscal 2023, the company opened 197, re-bannered eight and closed 43 stores. It opened 107 Dollar Tree stores and 90 Family Dollar outlets. In the quarter, DLTR closed 13 Dollar Tree and 30 Family Dollar stores. As of Oct 28, 2023, DLTR operated 16,622 stores in 48 states and five Canada provinces.
The company announced a comprehensive review of its Family Dollar portfolio to identify stores that are not aligned with its transformative vision.
Guidance
DLTR has narrowed its sales and EPS guidance range for fiscal 2023. The company’s guidance incorporates the effects of the continued momentum in the Dollar Tree banner, incremental freight savings, softer demand from low-income households, and a continuation of the shrink and sales mix headwinds throughout fiscal 2023. It excludes any potential impacts from the strategic review of the Family Dollar portfolio.
For fiscal 2023, Dollar Tree expects consolidated net sales of $30.5-$30.7 billion compared with the prior mentioned $30.6-$30.9 billion. The company anticipates mid-single-digit comps growth. Comps are likely to increase in the mid-single digits in the Dollar Tree banner and in the low-single digits in the Family Dollar segment. Previously, the company expected mid-single-digit comps growth at both Dollar Tree and Family Dollar segments. Selling square footage is expected to rise 3-3.5% for fiscal 2023.
Management expects earnings per share (EPS) of $5.81-$6.01 (including a 12-cent charge for the legal reserve incurred in the fiscal first quarter and gains from the 53rd week in fiscal 2023) compared with the prior stated $5.78-$6.08 for fiscal 2023.
For fourth-quarter fiscal 2023, the company expects consolidated net sales of $8.6-$8.8 billion based on low-single-digit comps growth for the enterprise. Comps are expected to improve in the mid-single digits at the Dollar Tree banner. Meanwhile, comps for the Family Dollar banner are likely to be between a decline of 1% and an increase of 1%. EPS is estimated to be $2.58-$2.78 for the fiscal fourth quarter.
Stocks to Consider
Some better-ranked companies are Target (TGT - Free Report) , Abercrombie & Fitch (ANF - Free Report) and American Eagle Outfitters (AEO - Free Report) .
Target, which provides an array of goods ranging from household essentials and electronics to toys and apparel for men, women and kids, currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for TGT’s fiscal 2023 sales indicates 1.4% growth from the year-ago reported level. The company has a trailing four-quarter earnings surprise of 24.2%, on average.
Abercrombie, a specialty retailer of premium, high-quality casual apparel for men, women, and kids, currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for Abercrombie’s current fiscal-year sales suggests growth of 12.3% from the year-ago reported number. ANF has a trailing four-quarter earnings surprise of 713%, on average.
American Eagle, a specialty retailer of casual apparel, accessories and footwear for men and women, currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for American Eagle’s current financial-year sales and earnings suggests growth of 3.7% and 37.1%, respectively, from the year-ago period’s actuals. AEO has a trailing four-quarter earnings surprise of 23%, on average.