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Dollar Tree (DLTR) Up 2.4% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
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A month has gone by since the last earnings report for Dollar Tree (DLTR). Shares have added about 2.4% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Dollar Tree due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Dollar Tree Q4 Earnings & Sales Beat Estimates

Dollar Tree reported top- and bottom-line beat in fourth-quarter fiscal 2018.  However, the company issued muted earnings guidance for both first-quarter and fiscal 2019. Management hinted that the outlook depends on the projection that Section 301 tariffs will move to 25% this month. However, management notified that if tariffs do not move to 25%, margins are likely to be benefited in the second half of the fiscal year.

Quarter in Detail

Dollar Tree’s adjusted earnings grew 2.1% to $1.93 per share and beat the Zacks Consensus Estimate by a penny. Bottom-line results were close to the higher end of the company’s guided range of $1.86-$1.95 per share. Excluding the impact from the 53rd week last year, the bottom line improved 14.9%.

Consolidated net sales decreased 4.2% to $6,205.2 million but exceeded the Zacks Consensus Estimate of $6,183 million. However, excluding impact from the 53rd week last year, the top line rose 4.2%.

Enterprise same-store sales (comps) grew 2.4% at constant currency. After adjusting the impact of Canadian currency fluctuations, enterprise comps grew 2.3%. Comps were aided by increases in both transactions and average ticket, alongside strength in the Dollar Tree and Family Dollar banners.

Comps for Dollar Tree rose 3.2% at constant currency while it improved 3.1% on adjusting the impact of Canadian currency fluctuations. Further, comps at Family Dollar inched up 1%.

Quarterly gross profit declined roughly 9% year over year to $1,912.1 million, while gross margin contracted 220 basis points (bps) to 30.8%. The margin contraction was mainly due to increased markdowns that include SKU rationalization markdown reserve at Family Dollar, along with higher domestic freight, shrink, distribution and occupancy expenses, somewhat compensated with fall in merchandise costs.

Meanwhile, adjusted selling, general and administrative expenses were flat at 21.3% of sales. Further, adjusted operating income declined 14.9% to $632.6 million in the quarter under review, with adjusted operating margin contraction of 150 bps to 10.2%.

Balance Sheet

Dollar Tree ended the quarter with cash and cash equivalents of $422.1 million, net merchandise inventories of $3,536 million, net long-term debt (excluding current maturities) of $4,265.3 million and shareholders’ equity of $5,642.9 million.

Store Update

In fourth-quarter fiscal 2018, Dollar Tree opened 143 stores, expanded or relocated 14 outlets and shuttered 84 Family Dollar as well as 10 Dollar Tree stores. Moreover, the company re-bannered five Family Dollar stores to the Dollar Tree brand. As of Feb 2, 2019, Dollar Tree operated 15,237 stores in 48 states and five Canadian provinces.

As part of its efforts to boost the store optimization program in fiscal 2019, the company has launched H2 — a latest model for the new and renovated Family Dollar stores internally. This model has been resulting in higher traffic, thus lifting average comps in excess of 10% over control stores.

Moreover, the company is expected to renovate a minimum of 1,000 Family Dollar stores in fiscal 2019. Further, it has plans to install adult beverages in roughly 1,000 stores, and expand freezers and coolers in roughly 400 outlets. Management expects to introduce 350 Dollar Tree and 200 Family Dollar stores, which is commendable. Also, it is expected to re-banner about 200 Family Dollar stores to Dollar Tree banner. Moreover, the company intends to close nearly 390 stores.

These store optimization measures are anticipated to help lift comps by up to 1.5%, after the implementation by the end of fiscal 2019.

Other Developments

Management suggested that due to the integration of real estate, supply chain, global sourcing, information technology, store development, finance, human resources, inventory management, and legal have helped in generating annual savings of more than $50 million. The company anticipates additional $15 million in annual savings upon completion of campus consolidation.

Moreover, the re-bannered Family Dollar stores have been contributing to the company’s profitability by more than $55 million per year, which are likely to increase. Dollar Tree banner has gained significantly by combining its purchasing power with that of Family Dollar. As a result of this, management expects annual savings for the Dollar Tree banner to be above $60 million in indirect procurement and also higher than $70 million in initial merchandise expenses.

Guidance

Management issued guidance for first-quarter and fiscal 2019. The company forecasts consolidated net sales of $5.74-$5.85 billion for the fiscal first quarter, with low-single-digit comps growth. Earnings are envisioned to be $1.05-$1.15 per share.

For fiscal 2019, it now projects consolidated net sales of $23.45-$22.87 billion. Comps are anticipated to grow in low-single digit along with nearly 1% rise in square footage. Earnings are envisioned to be $4.85-$5.25 per share, including discrete expenses of about $95 million.

Management expects operating income to be lower in the first half of fiscal 2019 due to higher costs incurred toward certain initiatives. It expects to spend $37 million toward store support center consolidation, $30 million toward incremental initiatives as well as $28 million related to store closures. However, it estimates a significant improvement in operating income in the second half, owing to gains from these initiatives.

Also, management believes these initiatives to boost earnings in fiscal 2020, wherein the earnings per share are likely to improve 14-18% over fiscal 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -10.78% due to these changes.

VGM Scores

At this time, Dollar Tree has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Dollar Tree has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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