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Dollar Tree (DLTR) Down 5.1% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Dollar Tree (DLTR). Shares have lost about 5.1% in that time frame, underperforming the S&P 500.

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

Dollar Tree Earnings & Sales Beat Estimates in Q1

Dollar Tree has reported first-quarter fiscal 2020 results, wherein earnings and sales surpassed the Zacks Consensus Estimate. Although earnings declined year over year, the company displayed strength in its operations amid the coronavirus crisis. Its top line benefited from the continuity of its store operations as well as an extraordinary spike in demand for certain products witnessed in March.

Moreover, the company stated that it is witnessing strong momentum in its business in the early fiscal second quarter, following the volatility in the first quarter. The Family Dollar stores are witnessing improvements in discretionary categories. Meanwhile, the Dollar Tree stores are seeing a rebound in its discretionary categories like crafts, graduation, stationery, Mother’s Day seasonal and balloons.

However, the company has refrained from updating its outlook for fiscal 2020, given expectations of continued volatility and uncertainty as the coronavirus situation evolves.

Quarter in Detail

Dollar Tree’s earnings declined 8.8% year over year to $1.04 per share but surpassed the Zacks Consensus Estimate of 85 cents.

Consolidated net sales rose 8.2% to $6,286.8 million and surpassed the Zacks Consensus Estimate of $6,184.2 million. Enterprise same-store sales (comps) grew 7%. Comps growth was backed by a 15.5% improvement in Family Dollar stores, offset by a 0.9% decline in Dollar Tree. Comps for the Dollar Tree segment were largely impacted by soft Easter holiday sales, with lower sales of seasonal and discretionary products. Categories like party, candy and Easter were the most impacted, which hurt comps by 490 basis points (bps).

Quarterly gross profit improved 3.9% year over year to $1,794.9 million, while gross margin contracted 120 bps to 28.5%. The margin contraction mainly resulted from adverse merchandise mix, incremental tariffs of $23 million, Easter merchandise-related markdowns and increased payroll costs at distribution centers. These gains were partly offset by occupancy costs leverage, driven by robust comps.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, contracted 40 bps to 22.7% due to leverage on operating and corporate expenses, occupancy costs, and advertising. These were partly negated by increased payroll expenses for premium wage payments to frontline associates and field management staff bonuses.

Operating income declined 5.1% to $365.9 million, while operating margin contracted 80 bps. The company’s fiscal first-quarter operating income included $73.2 million (23 cents per share) of additional operating costs related to the coronavirus outbreak. These comprised premium wages to hourly store and distribution store associates as well as supplies for sanitization and safety. Segment-wise, the company incurred additional costs of $42.2 million at Dollar Tree, $30.4 million at Family Dollar, and $0.6 million for Corporate and Support.

Balance Sheet

Dollar Tree ended the quarter with cash and cash equivalents of $1,755.1 million, comprising $750 million drawn on its revolving credit facility. Moreover, it had net merchandise inventories of $3,198.5 million, net long-term debt (excluding current maturities) of $3,223.3 million and shareholders’ equity of $6,520.6 million as of May 2, 2020.

On its March business update, the company suspended its share-repurchase plan, citing unprecedented effects of the COVID-19 crisis. Currently, it has nearly $800 million remaining under its share-buyback plan.

Store Update

In first-quarter fiscal 2020, Dollar Tree opened 99 stores, expanded or relocated 21 outlets, and shuttered 14 stores. It also completed the renovation of 220 Family Dollar stores to the H2 format. As of May 2, 2020, the company operated 15,370 stores in 48 states and five Canadian provinces.

Backed by the uncertainties related to the coronavirus pandemic, the company earlier suspended its Family Dollar H2 renovations and Dollar Tree Snack Zone installation initiatives to minimize travel and protect employees. It is now in the process of resuming the initiatives in select, low-risk markets. Consequently, the company now expects to complete 750 Family Dollar H2 renovations in fiscal 2020 compared with its initial guidance of 1,250 renovations. Its annual target for Dollar Snack Zone installations remained unchanged, although the timing of the completion is likely to shift according to the suspension.

Moreover, the company now plans to open 500 stores in fiscal 2020, including 325 Dollar Tree and 175 Family Dollar outlets. It had originally planned 550 store openings for fiscal 2020, comprising 350 Dollar Tree and 175 Family Dollar. However, the timing of the store openings is likely to be deferred.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 24.77% due to these changes.

VGM Scores

Currently, Dollar Tree has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, 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

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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