Dollar Tree (DLTR) Q2 Earnings and Sales Beat, Stock Up

Dollar Tree Inc. DLTR reported second-quarter fiscal 2019 results, wherein earnings and sales beat estimates. Moreover, the company narrowed its sales guidance for fiscal 2019. Meanwhile, it raised the earnings view for the fiscal, driven by its lowered discrete costs expectations.

Driven by the robust earnings view, shares of Dollar Tree grew 2.9% in the pre-market trading session. Though this Zacks Rank #4 (Sell) stock has gained 10.3% year to date, it lagged the industry's 34.1% growth.

Quarter in Detail

Dollar Tree’s earnings declined 33.9% to 76 per share but beat the Zacks Consensus Estimate of 70 cents. The bottom line also exceeded the company’s guidance of 64-73 cents per share.

Consolidated net sales rose 3.9% to $5,740.6 million and surpassed the Zacks Consensus Estimate of $5,721 million. Enterprise same-store sales (comps) grew 2.4%, marking the third straight quarter of sequential growth for the company. Comps growth was backed by 2.4% improvement in both Dollar Tree and Family Dollar segments.

While constant-currency comps for the Dollar Tree segment rose 2.4%, it improved 2.3% on adjusting the impact of Canadian currency fluctuations. The segment recorded comps growth despite nearly 40 basis points (bps) of negative impact of the shortage of helium. This marked the 46th straight quarter of comps growth for the Dollar Tree segment.

Quarterly gross profit dipped nearly 1% year over year to $1,648.5 million while gross margin contracted 140 bps to 28.7%. The margin contraction was mainly due to increased freight costs in both segments as well as higher markdowns and shrink in the Family Dollar segment.

Selling, general and administrative (SG&A) expenses rose 80 bps to 24% of sales, driven by higher operating and corporate expenses for the consolidation of store support centers, asset written off for closed stores, payroll costs due to higher average hourly rates and store-level initiatives.

Operating income declined 29.7% to $268.9 million. Driven by the soft gross margin and higher SG&A costs, adjusted operating margin contracted 220 bps to 4.7%.

Balance Sheet

Dollar Tree ended the quarter with cash and cash equivalents of $623.4 million, net merchandise inventories of $3,470.9 million, net long-term debt (excluding current maturities) of $3,518.6 million and shareholders’ equity of $5,865.7 million.

In the fiscal second quarter, the company bought back about 881,624 shares for $88.4 million. With this, it has nearly $812 million remaining under its current share buyback plan.

Store Update

In second-quarter fiscal 2019, Dollar Tree opened 150 stores, expanded or relocated 19 outlets, and shuttered 296 Family Dollar as well as nine Dollar Tree stores. The Family Dollar store closures were in sync with the company’s previously announced store optimization plan. Moreover, it opened 106 Dollar Tree stores, which were re-bannered Family Dollar stores. As of Aug 3, 2019, Dollar Tree operated 15,115 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 — the latest model for the new and renovated Family Dollar stores internally. These renovations are likely to boost traffic at stores, thus lifting average comps. The company had nearly 200 H2 stores at the beginning of fiscal 2019. During the fiscal second quarter, it completed the renovation of 542 Family Dollar to the H2 format.

Driven by the robust momentum in Family Dollar stores due to these initiatives, the company raised its targeted Family Dollar H2 renovations for fiscal 2019 by 150 stores. It now expects 1,150 Family Dollar H2 renovations to occur in fiscal 2019 compared with 1,000 mentioned earlier. The majority of the increased H2 renovations will be carried out in the fiscal third quarter.

Guidance

Management issued guidance for the fiscal third quarter. However, it narrowed the sales view for fiscal 2019 and raised the earnings guidance to reflect gains from its lowered discrete costs guidance. The company now estimates to incur discrete costs of $85 million in fiscal 2019 compared with $95 million stated earlier. While it has stated that it mitigated most of the impacts of tariffs already in place, its guidance for fiscal 2019 excludes any impact of additional rise in tariffs.

The company forecasts consolidated net sales of $5.66-$5.77 billion for the fiscal third quarter, with low-single-digit comps growth. Earnings are envisioned to be $1.07-$1.16 per share. This includes the impact of about $9 million (or 3 cents per share) from discrete costs to be incurred in the fiscal third quarter. The company already incurred discrete costs of $76 million in the first half of fiscal 2019.

For fiscal 2019, it now projects consolidated net sales of $23.57-$23.79 billion compared with the previously mentioned $23.51-$23.81 billion. Comps are anticipated to grow in a low-single digit along with nearly 1.3% rise in square footage. Earnings are envisioned to be $4.90-$5.11 per share versus $4.77-$5.07 stated earlier, including discrete expenses of about $85 million.

Some Better-Ranked Stocks in the Discount Stores Industry

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

Burlington Stores, Inc. BURL currently has a long-term expected earnings growth rate of 17% and a Zacks Rank #2.

Tuesday Morning Corp. TUES, also a Zacks Rank #2 stock, delivered average positive earnings surprise of 25.4% in the trailing four quarters.

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