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Why Is Dollar Tree (DLTR) Up 2.2% Since Last Earnings Report?

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It has been about a month since the last earnings report for Dollar Tree (DLTR - Free Report) . Shares have added about 2.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Dollar Tree due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Dollar Tree Q2 Earnings Miss, Revises '18 View

Dollar Tree reported lower-than-expected results in second-quarter fiscal 2018. However, both earnings and sales improved year over year. Further, management issued guidance for the third quarter and updated outlook for the fiscal year.

Quarter in Detail

Dollar Tree’s quarterly adjusted earnings grew 16.2% to $1.15 per share but missed the Zacks Consensus Estimate by a penny. Also, it came near the top end of the company’s guided range of $1.07-$1.16 per share.

Consolidated net sales were up 4.6% to $5,525.6 million in the quarter. However, the reported figure came below the Zacks Consensus Estimate of $5,537 million.

Further, enterprise same-store sales (comps) grew 1.8% in constant currency, while it rose 1.9% after adjusting the impact from Canadian currency fluctuations. Comps at Dollar Tree were up 3.7% on a constant-currency basis driven by improved average ticket and traffic. Including the Canadian currency fluctuations impact, comps at Dollar Tree rose 3.8%. However, comps at Family Dollar were flat in the quarter.

The company’s quarterly gross profit advanced 2.2% year over year to $1,663.9 million, while the gross margin contracted 70 basis points (bps) to 30.1%. The margin contraction was mainly due to increased domestic freight, shrink and distribution expenses, somewhat compensated with lower merchandise costs.

Selling, general and administrative expenses increased 30 bps to 23.2% of sales owing to increased store payroll expenses, partly offset by lower depreciation and amortization expenses as well as reduced store repairs and maintenance costs, as a percentage of sales.

Further, operating income dipped 8.8% to $382.5 million in the reported quarter. Also, operating margin came in at 6.9%, down 100 bps from the year-ago quarter.

Balance Sheet

Dollar Tree ended the quarter with cash and cash equivalents of $647.3 million, net merchandise inventories of $3,288.2 million, net long-term debt excluding current maturities of $5,041.8 million and shareholders’ equity of $7,647.5 million.

Store Update

Dollar Tree opened 146 outlets, expanded or relocated 13 outlets and shuttered 26 outlets in the reported quarter. As of Aug 4, 2018, Dollar Tree operated 15,073 stores in 48 states and five Canadian provinces.

Guidance

Management updated guidance for third-quarter and fiscal 2018. It forecasts consolidated net sales for the third quarter in the band of $5.53-$5.64 billion, with low single-digits comps growth. Earnings are envisioned in the range of $1.11-$1.18 per share.

For fiscal 2018, it projects consolidated net sales in the range of $22.75-$22.97 billion compared with 22.73-$23.05 billion guided earlier. Comps are still anticipated to grow low single-digits along with 3.4% rise in square footage.

Further, management projects incurring a charge of 4 cents per share in the fiscal fourth quarter owing to anti-dumping duty imposed on certain ribbon bought from China. Consequently, earnings per share for the fiscal year are now envisioned in the band of $4.85-$5.05 compared with previous guided range of $4.80-$5.10.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, Dollar Tree has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Dollar Tree has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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