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Dollar Tree (DLTR) Down on Q1 Earnings Miss, Comps Aid Sales

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Dollar Tree Inc. (DLTR - Free Report) reported mixed first-quarter fiscal 2019 results, wherein earnings missed estimates while sales beat. Moreover, the company narrowed its sales and earnings guidance for fiscal 2019. Management also hinted that the outlook depends on the potential imposition of tariffs on List 4 goods.

Driven by the soft earnings and outlook, the company’s shares dropped 2% in the pre-market trading session. Though this Zacks Rank #3 (Hold) stock has gained 9% year to date, it underperformed the industry's 12.9% growth.



Quarter in Detail

Dollar Tree’s adjusted earnings declined 4.2% to $1.14 per share and missed the Zacks Consensus Estimate by a penny. However, earnings were near the high end of the company’s guided range of $1.05-$1.15 per share.

Dollar Tree, Inc. Price, Consensus and EPS Surprise

Dollar Tree, Inc. Price, Consensus and EPS Surprise

Dollar Tree, Inc. price-consensus-eps-surprise-chart | Dollar Tree, Inc. Quote

Consolidated net sales rose 4.6% to $5,808.7 million but exceeded the Zacks Consensus Estimate of $5,789.4 million. Enterprise same-store sales (comps) grew 2.2% against the toughest comparison from the year-ago quarter. This marked the 45th consecutive quarter of comps growth for the company.

Comps for Dollar Tree rose 2.5% at constant currency while it improved 2.4% on adjusting the impact of Canadian currency fluctuations. Further, comps at Family Dollar rose 1.9%, marking the strongest quarterly performance since the company began reporting comps for this banner.

Quarterly gross profit improved 1.6% year over year to $1,727.2 million, while gross margin contracted 90 basis points (bps) to 29.7%. The margin contraction was mainly due to lower initial markup at Family Dollar, increased domestic freight and distribution costs, shrink in the Family Dollar segment and increase in occupancy costs related to increased rent expense for Family Dollar stores scheduled to close in 2019.

Selling, general and administrative (SG&A) expenses increased 40 bps to 23.1% of sales, driven by operating and corporate expenses for the consolidation of store support centers, payroll costs linked to investment in store hourly payroll and higher legal fees, partially offset by lower depreciation and amortization costs.

Adjusted operating income declined 11.9% to $385.5 million. Driven by the soft gross margin and higher SG&A costs, adjusted operating margin contracted 130 bps to 6.6%.

Balance Sheet

Dollar Tree ended the quarter with cash and cash equivalents of $725.8 million, net merchandise inventories of $3,325.5 million, net long-term debt (excluding current maturities) of $3,516.9 million and shareholders’ equity of $5,755.9 million.

Store Update

In first-quarter fiscal 2019, Dollar Tree opened 91 stores, expanded or relocated 11 outlets and shuttered 16 Family Dollar as well as nine Dollar Tree stores. Moreover, the company re-bannered 45 Family Dollar stores to the Dollar Tree brand. As of May 4, 2019, Dollar Tree operated 15,264 stores in 48 states and five Canadian provinces.

As part of its store optimization program for the Family Dollar brand, the company is rolling out H2 — a latest model for the new and renovated Family Dollar stores internally. Initial tests of this model have been favorable, resulting in higher traffic, thus lifting average comps in excess of 10% over control stores. The company had nearly 200 H2 stores at the beginning of fiscal 2019, which has expended to about 550 locations as of May 4, 2019. The company expects to renovate at least 1,000 stores in fiscal 2019.

Moreover, the company is on track to close underperforming Family Dollar stores. It is closing about 75 Family Dollar stores annually. In fiscal 2019, it plans to close 390 stores, majority of which will take place in the second quarter. Additionally, the company plans to re-banner about 200 Family Dollar stores as Dollar Tree locations in fiscal 2019.

Furthermore, it has plans to install adult beverages in roughly 1,000 Family Dollar stores, and expand freezers and coolers in roughly 400 Family Dollar outlets in fiscal 2019. In the first quarter, the company added adult beverages to nearly 45 stores and freezers and coolers in 55 stores.

Guidance

Management issued guidance for the second quarter. However, it narrowed the earnings and sales view for fiscal 2019. The company forecasts consolidated net sales of $5.66-$5.76 billion for the fiscal second quarter, with low-single-digit comps growth. Earnings are envisioned to be 64-73 cents per share. This includes discrete costs of about $57 million to be realized in the second quarter, of the $95 million estimated for fiscal 2019.

The company’s guidance includes $30 million (or 10 cents per share) of costs related to second quarter store closures for lease obligations and other costs, which were not included in the prior outlook.

For fiscal 2019, it now projects consolidated net sales of $23.51-$23.81 billion, compared with the previous guidance of $23.45-$22.87 billion. Comps are anticipated to grow in low-single digit along with nearly 1% rise in square footage. Earnings are envisioned to be $4.77-$5.07 per share, versus the prior range of $4.85-$5.25, including discrete expenses of about $95 million. Additionally, the company’s fiscal 2019 view includes the aforementioned store closure costs as well as $15 million (or 5 cents per share) of import freight costs due to higher freight rates based on negotiations arrived in April.

The company’s guidance includes exception that Section 301 tariffs will be 25% on List 1, 2, and 3 goods. However, it does not include the potential tariffs on List 4 goods, which if implemented may impact both of its businesses.

Better-Ranked Stocks in the Discount Stores Industry

Target Corp. (TGT - Free Report) has an impressive long-term expected earnings growth rate of 7.1% and a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The TJX Companies, Inc. (TJX - Free Report) has a long-term expected earnings growth rate of 10.9% and carries a Zacks Rank #2.

PriceSmart Inc. (PSMT - Free Report) , also a Zacks Rank #2 stock, delivered average positive earnings surprise of 20.7% in the trailing four quarters.

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