Dollar Tree Inc. (DLTR) came up with better-than-expected results for third-quarter fiscal 2014, wherein both its top and bottom lines beat the Zacks Consensus Estimate and also registered significant year-over-year growth.
The discount variety store operator’s adjusted earnings of 69 cents per share for the quarter were nearly 19% higher than the year-ago comparable quarter’s earnings of 58 cents. Adjusted earnings also surpassed the Zacks Consensus Estimate of 65 cents per share.
Adjusted earnings for the reported quarter exclude a charge of 5 cents per share related to costs associated with the pending acquisition of Family Dollar Stores Inc. (FDO). Including the same, Dollar Tree’s earnings came in at 65 cents per share, up 12% year over year.
Quarterly Details
Revenues increased 11.2% on a year-over-year basis in the quarter to $2,095.2 million and came ahead of the Zacks Consensus Estimate of $2,065 million. Comparable-store sales (comps) increased 5.9% compared with a 3.1% increase recorded in the prior-year quarter.
Dollar Tree's quarterly gross profit rose approximately 9.9% year over year to $725.3 million, while gross margin contracted 40 basis points (bps) to 34.6%. The year-over-year decline in gross margin was mainly due to a rise in freight cost.
Adjusted selling, general and administrative (SG&A) expenses increased 7.8% to $491.3 million. However, as a percentage of revenues, it contracted 80 bps year over year to 23.4%.The decline in SG&A as a percentage of sales was driven by strong comps growth and efficient expense management that led to lower store operating costs.
Adjusted operating income for the quarter escalated 14.5% to $234 million. As a percentage of sales, it expanded 40 bps to 11.2%, representing a record third-quarter operating margin, primarily due to reduced gross margin, partially offset by lower SG&A expenses as a percentage of revenue.
Balance Sheet and Capex
Dollar Tree ended the quarter with cash and cash equivalents of $407.6 million compared with cash balance of $147.1 million at the end of third-quarter fiscal 2013.
Merchandise inventories were $1,304.9 million compared with $1,237.4 million as of Nov 2, 2013. During the first three quarters of fiscal 2014, the company’s capital expenditure was $254.4 million as against $284.1 in the prior-year period.
Store Update
In the quarter, the company further expanded its store network by opening 117 stores, expanding or relocating 18 stores, while it shut down 1 store. Retail selling square footage grew 6.8% year over year to 45.8 million in the quarter.
Looking Ahead
Following the third-quarter results, the company initiated its fourth-quarter guidance and raised its sales and earnings forecast for fiscal 2014.
Dollar Tree now anticipates sales for the fiscal to come in the range of $8.52–$8.58 billion as compared with the earlier anticipation of $8.44–$8.55 billion. Moreover, the company narrowed its previously stated earnings per share guidance range for the fiscal. It now anticipates earnings to come in the range of $2.97–$3.04 per share against $2.94–$3.06 projected earlier.
The company’s earnings guidance for fiscal 2014 includes 7 cents per share of acquisition-related charges as compared with the previously anticipated charges of 2 cents per share.
For the fourth quarter, Dollar Tree expects total sales to be in the range of $2.39–$2.46 billion on the back of low-single digit comps growth. Further, the company anticipates earnings in the range of $1.07–$1.14 per share, excluding acquisition related expenses in the upcoming quarter.
Dollar Tree is considered to be one of the best-positioned dollar store concepts, especially with its evolving multi-price point chain. We believe that the company is doing a commendable job internally in managing controllable inputs, whereas increasing back-haul opportunities at the same time.
Dollar Tree currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail space are L Brands Inc. (LB) and Zumiez Inc. (ZUMZ), both carrying a Zacks Rank #2 (Buy).
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