Dollar Tree, Inc. DLTR hits new 52-week low of $86.19 on Jan 27, before closing the session slightly higher at $88.4. A look at the company’s price trend reveals that the stock has had an unimpressive run on the bourses in the past three months. Notably, the Zacks Rank #3 (Hold) stock has declined 21.5% in the said period against the industry’s growth of 3%.
Apart from these, the company’s dismal earnings performance in third-quarter fiscal 2019, owing to soft margins as well as a drab view for fiscal 2019 on high tariffs, raises concern.
Here we take a sneak peek at the major issues plaguing Dollar Tree.
A Brief Introspection
The company is one of the many retailers facing the heat of elevated tariffs. Post the announcement of Section 301 tariffs, for fourth-quarter fiscal 2019, management anticipated $19 million (or 6 cents per share) rise in cost of goods sold. Further, the company lowered the outlook for fiscal 2019 on anticipated impacts from tariffs.
For fiscal 2019, it projects consolidated net sales of $23.62-$23.74 compared with previously mentioned $23.57-$23.79 billion. 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.
Moreover, the company is grappling with soft margins for quite some time now. Notably, third-quarter fiscal 2019 was the seventh straight quarter of soft gross and operating margin performance. Higher freight and distribution costs, improved sales of low-margin consumable merchandise primarily in the Family Dollar segment, increased shrink due to store lifting, and higher SG&A costs are primarily weighing on margins.
Additionally, Dollar Tree expects incremental pressure on merchandise margin, thanks to 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. Further, adjusted earnings are expected to be $1.70-$1.80, down from $1.93 reported in the prior-year quarter.
We believe that the company’s struggle is likely to continue as its growth prospects appear bleak, considering adverse impacts of additional tariffs. However, robust comps trend along with strategic initiatives like the Dollar Tree Plus! test and store-optimization efforts might provide some cushion to the stock.
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