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Dollar Tree (DLTR) Slumps on Q3 Earnings Miss, FY19 View Cut

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Dollar Tree Inc. (DLTR - Free Report) has reported third-quarter fiscal 2019 results, wherein earnings missed the Zacks Consensus Estimate but sales beat the same. Further, earnings and sales declined on a year-over-year basis. Moreover, the company lowered its guidance for fiscal 2019 based on anticipated tariffs.

Driven by the soft earnings results in the third quarter and lowered view for fiscal 2019, shares of Dollar Tree declined sharply in the pre-market trading session on Nov 26. In the past three months, shares of the Zacks Rank #3 (Hold) company have gained 16.2%, outperforming the industry's 10% growth.



Quarter in Detail

Dollar Tree’s earnings declined 8.5% to $1.08 per share and missed the Zacks Consensus Estimate of $1.12. The bottom line was near the low-end of the company’s guidance of $1.07-$1.16 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 3.7% to $5,746.2 million and surpassed the Zacks Consensus Estimate of $5,735 million. Enterprise same-store sales (comps) grew 2.5%. Comps growth was backed by a 2.8% improvement in Dollar Tree and a 2.3% increase in Family Dollar. This marked the 47th straight quarter of comps growth for the Dollar Tree segment.

Quarterly gross profit dipped 1.9% year over year to $1,704.5 million, while gross margin contracted 50 bps to 29.7%. The margin contraction mainly resulted from increased freight and distribution costs, higher sales of low-margin consumable merchandise primarily in the Family Dollar segment, and increased shrink.

Selling, general and administrative (SG&A) expenses rose 30 bps to 23.5% of sales, thanks to higher operating and corporate expenses for the consolidation of store support centers, costs related to asset disposals for closed stores, and slight increase in depreciation expenses. This was partly offset by lower payroll and benefits expenses.

Operating income declined 7.6% to $358.4 million. Driven by the soft gross margin and higher SG&A costs, adjusted operating margin contracted 80 bps to 6.2%.

Balance Sheet

Dollar Tree ended the quarter with cash and cash equivalents of $433.7 million, net merchandise inventories of $3,882.9 million, net long-term debt (excluding current maturities) of $3,520.2 million, and shareholders’ equity of $6,121.3 million.

In the fiscal third quarter, the company bought back about 125,048 shares for $11.6 million. With this, it has nearly $800 million remaining under the current share buyback plan.

Store Update

In third-quarter fiscal 2019, Dollar Tree opened 165 stores, expanded or relocated 15 outlets, and shuttered 30 Family Dollar as well as 12 Dollar Tree stores. The Family Dollar store closures were in sync with the company’s previously announced store optimization plan. Moreover, it re-bannered 39 Family Dollar stores into Dollar Tree. It also completed the renovation of 247 Family Dollar stores to the H2 format. As of Nov 2, 2019, Dollar Tree operated 15,262 stores in 48 states and five Canadian provinces.

Driven by the robust momentum in Family Dollar stores due to these initiatives, the company expects 1,150 Family Dollar H2 renovations to occur in fiscal 2019. Further, it now plans more than 1,000 Family Dollar H2 renovations for fiscal 2020.

Guidance

Based on the impacts of the Section 301 tariffs, which were announced prior to second-quarter fiscal 2019 earnings results, management issued guidance for the fiscal fourth quarter, which is lower than the previously implied one. Further, it lowered the outlook for fiscal 2019. If implemented, the company expects the Section 301 tariffs to increase cost of goods sold by $19 million (or 6 cents per share) in fourth-quarter fiscal 2019.

Apart from the aforementioned impacts of tariffs, Dollar Tree expects incremental pressure on merchandise margin on lower-margin consumables growing faster than planned; payroll costs in distribution centers; and increased run rates for repairs and maintenance, utilities, and depreciation, to affect results for the fiscal fourth quarter. Consequently, it projects net sales of $6.33-$6.44 billion, with a low-single-digit increase in enterprise same-store sales in the fiscal fourth quarter. Further, it expects earnings per share, including tariff costs, of $1.70-$1.80 for the quarter.

For fiscal 2019, it projects consolidated net sales of $23.62-$23.74 compared with previously mentioned $23.57-$23.79 billion. The company anticipates low-single-digit comps growth along with 1.1% rise in square footage. It now envisions earnings of $4.66-$4.76 per share versus $4.90-$5.11 stated earlier. This includes discrete costs of 28 cents per share, store closure related costs of 5 cents and tariff-related costs of 6 cents.

Some 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%.  It sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dollar General Corp. (DG - Free Report) currently has a long-term expected earnings growth rate of 10.2% and a Zacks Rank #2 (Buy).

Ross Stores, Inc. (ROST - Free Report) , also a Zacks Rank #2 stock, has a long-term expected earnings growth rate of 10.5%.

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