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Dollar Tree Beats by a Penny

Zacks Equity Research

Dollar Tree Inc. (DLTR) posted strong fiscal 2011 fourth-quarter earnings of $1.60 a share, up 24% from the year-ago earnings of $1.29 a share, surpassing its guidance range of $1.50 to $1.57. Moreover, quarterly earnings also beat the Zacks Consensus Estimate by a penny. Higher sales and improved margins benefited Dollar Tree to post robust quarterly results.

Quarterly Details

Dollar Tree's total revenue grew 12.8% in the quarter to $1,945.6 million from $1,725.3 million in the prior-year quarter, outpacing the Zacks Consensus Estimate of $1,931 million. The company’s revenue came ahead of its earlier guidance range of $1,890 million to $1,940 million. Higher sales were primarily driven by a robust growth in comparable store sales of 7.3% compared with an increase of 3.9% registered in the prior-year quarter.

The company's quarterly gross profit climbed 14% year over year to $734.5 million, while gross margin expanded 20 basis points to 37.8%. Operating income for the quarter grew 17% to $302 million. Operating margin came in at 10.3%, up 50 basis points from the year-ago period, primarily benefiting from a 20 basis point improvement in gross margin and 30 basis point drop in selling, general and administrative expenses as a percentage of sales.

Fiscal 2011 Highlights

Earnings per share for full fiscal 2011 surged 30% year over year to $4.03 per share, beating its own fiscal earnings guidance range of $3.94 to $4.01, in line with the Zacks Consensus Estimate.

Total revenue climbed 12.7% to $6,630.5 million compared with $5,882.4 million in the previous fiscal, beating the Zacks Consensus Estimate of $6,613 million. The company’s revenue came ahead of the earlier guidance range of $6,570 million to $6,620 million. An increase of 6% in comparable store sales on top of a 6.3% rise in previous fiscal led to this robust revenue growth.

Balance Sheet

Dollar Tree ended the fiscal with cash and cash equivalents of $288.3 million compared with cash balance of $311.2 million in the previous fiscal. Long-term obligations for the fiscal came in at $250 million. Merchandise inventories were up 8% year over year to $867.4 million. In fiscal 2011, the company spent $250.1 million on capital expenditure.

Share Repurchase

During the quarter, the company repurchased 3.5 million shares for $300 million. In full-year 2011, Dollar Tree repurchased a total of 8.7 million shares for $645.9 million. Currently, Dollar Tree has shares worth $1.2 billion remaining under its ongoing share buyback program.

In the quarter, the company opened 21 stores, relocated 3 stores and shut down operations of 5 stores. Currently, the company operates 4,351 stores in 48 states and 5 Canadian Provinces.

Fiscal 2012 Outlook

Dollar Tree expects total sales in the range of $1.65 billion to $1.69 billion on the back of low-to-mid single-digit same-store sales growth in the first quarter of fiscal 2012. Further, the company anticipates earning in the range of 91 cents to 97 cents a share in the ensuing quarter.

For fiscal 2012, the company expects sales to be in the range of $7.25 billion to $7.42 billion on the back of low-to-mid single-digit same-store sales growth. The company sees earnings in the range of $4.65 to $4.91 per share for fiscal 2012.

Our Take

Dollar Tree is considered one of the best-positioned dollar store concepts, especially with its evolving multi-price point chain. We believe the company is doing a commendable job internally of managing controllable inputs, including reducing stem miles while increasing back-haul opportunities. The company continues to generate robust same-store sales growth, indicating its focus on low-priced wants and needs commodities. The rise in comparable sales is attributable to increased traffic, reflecting continued top-line growth.

Additionally, the company’s strong free cash flow generation signals an enhanced share buyback program, as the company, apart from stores growth, uses majority of free cash flow to buyback shares. Further, the company’s recently announced accelerated share repurchase program reflects management’s continued confidence in the business and the consistency of its cash flow generation.

Dollar Tree operates as a discount retailer of general merchandise in the southern, southwestern, midwestern, and eastern United States. The company is in direct competition with Dollar General Corporation (DG) and Family Dollar Stores Inc. (FDO).

Currently, Dollar Tree has a Zacks #2 Rank, implying a short-term Buy rating on the stock. Besides, the company retains a long-term Neutral recommendation.

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