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Dollar Tree (DLTR) Q2 Earnings Beat, Updated View Hurts Stock

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Dollar Tree, Inc. DLTR has posted better-than-expected earnings per share in second-quarter fiscal 2021, while sales lagged the Zacks Consensus Estimate. However, both sales and earnings improved year over year. Results benefited from continued strong momentum in discretionary offerings. Compelling results from the H2, Dollar Tree Plus and the new Combo Stores, which form part of the company’s key initiatives, also aided the second-quarter fiscal 2021 performance. Consequently, it outlined plans to accelerate its key initiatives in fiscal 2022 and beyond.

However, elevated freight costs have been headwinds across the industry. Driven by the expectations of a further increase in freight costs, the company slashed its earnings per share view for fiscal 2022. This resulted in negative investor sentiments on the company’s earnings release, leading shares of Dollar Tree to decline 4% in the pre-market session on Aug 26.

Shares of the Zacks Rank #3 (Hold) company have gained 6.2% in the past three months compared with the industry's 11.4% growth.

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Quarter in Detail

Dollar Tree’s earnings rose 11.8% year over year to $1.23 per share and surpassed the Zacks Consensus Estimate of $1.03. Earnings also improved 61.8% from second-quarter fiscal 2019.

Consolidated net sales rose 1% year over year to $6,343.2 million but lagged the Zacks Consensus Estimate of $6,451 million. Enterprise same-store sales (comps) fell 1.2% on a constant-currency basis and 1.1% after adjusted for the impacts of Canadian currency fluctuations. Soft comps resulted from weak performances at both Dollar Tree and Family Dollar segments. Comps declined 0.2% (flat after adjusting the aforementioned currency fluctuations) at Dollar Tree stores and 2.1% at the Family Dollar segment.

Dollar Tree, Inc. Price, Consensus and EPS Surprise

Dollar Tree, Inc. Price, Consensus and EPS Surprise
Dollar Tree, Inc. Price, Consensus and EPS Surprise

Dollar Tree, Inc. price-consensus-eps-surprise-chart | Dollar Tree, Inc. Quote

Gross profit declined 2.9% year over year to $1,861 million and gross margin contracted 110 bps to 29.4%. The decline in gross margin can be attributed to elevated freight costs, partly negated by continued improvement in shrink. Gross margin contracted 130 bps and 100 bps at Dollar Tree and Family Dollar segments.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, declined 150 bps to 23%, driven by reduced COVID-related costs. The company cycled of COVID-related costs of $123.5 million incurred in the year-ago quarter.

Operating income rose 7.3% to $402.2 million and operating margin expanded 30 bps to 6.3%. The decline in gross margin was more than offset by a lower SG&A expense rate. Segment-wise, the operating margin expanded 40 bps to 10.1% for Dollar Tree but declined 20 bps to 5.1% at the Family Dollar segment.

Balance Sheet

Dollar Tree ended the quarter with cash and cash equivalents of $720.8 million. Net merchandise inventories increased 12% to $3,667.7 million. It had net long-term debt (excluding current maturities) of $3,229.5 million and shareholders’ equity of $7,011.7 million as of Jul 31, 2021. Outstanding debt as of the quarter-end was $3.25 billion.

In second-quarter fiscal 2021, the company bought back 7,006,326 shares for $700 million. As of Jul 31, 2021, the company had $1.45 billion remaining under its existing authorization.

For fiscal 2021, it expects to incur a capital expenditure of $1.1 billion. It expects to use the majority of the excess cash flow generated to repurchase shares under the aforementioned program.

Store Update

In second-quarter fiscal 2021, Dollar Tree opened 131 stores, expanded or relocated 30 outlets, and shuttered 37 stores. It also completed the renovation of 470 Family Dollar stores to the H2 or Combo Store formats. As of Jul 31, 2021, the company operated 15,865 stores in 48 states and five Canada provinces.

Key Real Estate Initiatives Update

Dollar Tree is delivering compelling results for its key initiatives, which include the expanding footprint of the H2, Dollar Tree Plus and Combo Stores. The Family Dollar H2 stores have been performing well, with about 435 Family Dollar stores renovated to the H2 format in the fiscal second quarter. It currently has 3,300 Family Dollar H2 stores. In fiscal 2022, the company expects to complete 800 Family Dollar H2 Renovations as part of the Key Real Estate Initiative.

Its multi-price point Dollar Tree Plus concept store is gaining popularity among customers, particularly for discretionary categories. This has helped improve store productivity. Consequently, the company plans to accelerate the Dollar Tree Plus initiative by adding additional 1,500 stores in fiscal 2022. It also expects to have at least 5,000 Dollar Tree Plus stores by the end of 2024. The company currently has multi-price assortments in 340 stores and expects to expand it to 500 stores by the end of fiscal 2021.

The company’s newest format store — Combo Store — which leverages the strengths of both banners under one roof has exceeded expectations. Dollar Tree currently has 105 Combo Stores in operation. The company believes it has an opportunity for up to 3,000 Combo Stores in rural areas. Driven by the positive response, it expects the Combo Store to be the key strategic format, anticipating 85% of the newly opened Family Dollar stores to be Combo Stores in fiscal 2022. Consequently, it expects 400 new or renovated Combo Stores for fiscal 2022.

Outlook

For third-quarter fiscal 2021, Dollar Tree expects consolidated net sales of $6.40-$6.52 billion, with comps growth in low-single digits. It anticipates earnings of 88-98 cents per share.

For fiscal 2021, the company expects net sales of $26.19-$26.44 billion, with low-single-digit comp growth. Management now envisions earnings of $5.40-$5.60 per share, down from $5.80-$6.05 per share mentioned earlier. The lowered earnings forecast is mainly attributed to the expectations of elevated freight costs for fiscal 2021.

For fiscal 2021, the company expects freight costs of $1.50-$1.60 per share, higher than fiscal 2020. The revised freight cost view includes 60-65 cents per share ($185-$200 million) of additional freight costs versus the previously mentioned range issued on May 27, 2021.

The freight cost guidance provided on the first-quarter fiscal 2021 earnings call assumed that the company’s regular ocean carriers will only fulfill 85% of their contractual commitments. It also assumes higher spot market rates. However, the company expects regular carriers to only fulfill 60-65% of their commitments.

Dollar Tree also notes that the spot market rates for ocean freight from China have been trending higher than the all-time highs. It stated that the spot rates have increased more than 20% since the last earnings report in May. The company also stated that it expects the volatility in the ocean carriers’ ability to fulfill commitments to continue in the near term, while this is not expected to be a permanent scenario.

Notably, the company’s Dollar Tree banner is extremely sensitive to higher freight costs due to its one-dollar price point. To overcome the situation, it is taking several steps to mitigate the impacts of freight and improve gross merchandise margin.

Better-Ranked Stocks in the Retail Space

The TJX Companies, Inc. TJX currently sports a Zacks Rank #1 (Strong Buy) and has a long-term earnings growth rate of 10.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Abercrombie & Fitch Company ANF, also a Zacks Rank #1 stock, has an expected long-term earnings growth rate of 18%.

Dollar General Corporation DG has a long-term earnings growth rate of 11.3% and a Zacks Rank #2 (Buy) at present.


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