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Dollar Tree Q1 Preview: What Can Investors Expect?

·5 min read

Earnings season continues to wind down, and it’s been one for the books, to say the least.

We’ve witnessed double-digit percentage valuation slashes occur in a few companies’ shares following their quarterly releases, telling us that many of them struggled throughout the quarter. Since stocks typically move up during earnings season, it’s been quite the shock to many.

We’ve all become too familiar with the issues affecting companies throughout the quarter – supply chain bottlenecks, a hawkish Fed, soaring energy costs, and geopolitical issues.

Nonetheless, the market rolls on, and market participants must remain focused. A retailer set to release its quarterly results after the bell rings tomorrow on Wednesday is Dollar Tree DLTR.

Share Performance & Earnings Impact

Dollar Tree DLTR shares had been a bright spot in a dim market throughout the majority of 2022, but since the release of other retailers’ earnings, shares took on a downward trajectory, signaling that investor sentiment has massively changed. Still, DLTR shares have outperformed the S&P 500’s decline of 17%.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Shares have not always reacted positively to better-than-expected quarterly results. Over its last six EPS beats, shares have moved upwards four times and have declined twice. Additionally, it’s worth noting that the two negative share reactions occurred when DLTR beat EPS estimates quite handily by double-digit percentages.

Earnings Surprise

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Zacks Investment Research


Image Source: Zacks Investment Research

Furthermore, Dollar Tree has an ESP Score of -4.8% heading into tomorrow and is a Zacks Rank #4 (Sell). Pairing a positive Earnings ESP and a Zacks Rank #3 or greater vastly increases the odds of an earnings beat, and Dollar Tree is not within those parameters.

DLTR beat EPS estimates handily by 12% in its latest quarter but posted worse-than-expected sales results, with higher-than-expected freight costs playing spoilsport for both the top and bottom line. Over its last four quarters, Dollar Tree has beat EPS estimates by 12%, on average.

Valuation

Dollar Tree’s forward earnings multiple sits at 16.6X, which is well below 2022 highs of 25.6X, and slightly under the median of 18.1X over the last five years. Additionally, the current value represents a 6% discount relative to the S&P 500’s forward P/E ratio of 17.6X.

In its latest quarter, free cash flow yield was reported at 1.2%, a marginal 0.3% decrease from the prior quarter. In fact, free cash flow yield has fallen from 9.5% in 2021 Q1, a concerning development.

EPS & Revenue Estimates

The Zacks Consensus EPS Estimate for the quarter being reported tomorrow sits at $1.99 per share, with one analyst downwardly revising their outlook over the last week – this has been the only analyst to revise their EPS estimate over the previous 60 days, which raises a few red flags.

However, the quarterly estimate does display a 25% growth in earnings from the year-ago quarter.

Revenue estimates display top-line strength. For the quarter, the Zacks Consensus Sales Estimate has DLTR raking in $6.8 billion, a 4% increase when compared to year-ago quarterly sales of $6.5 billion. However, out of its last four quarters, DLTR has beat sales expectations once.

Other Retail Earnings

Retail sales in the United States increased 0.9% month over month in April. It came as a bit of a surprise, as it shows us that consumers are essentially shrugging off the high inflation levels. While this has benefitted the top lines of retailers, the bottom lines have been massively impacted by freight costs and supply chain bottlenecks.

This was further displayed by Walmart WMT and Target TGT in their quarterly results reported earlier this month.

Target reported earnings of $2.19 per share, which majorly missed the Zacks Consensus Estimate of $3.00 per share by a sizable 27% and reflected a 41% decline in earnings from the year-ago quarter. However, TGT beat on the top line, reporting quarterly sales of $25.2 billion, which easily beat the Zacks Consensus Estimate of $24.5 billion.

Similarly, Walmart beat top-line estimates by a respectable 2.4% and reported quarterly sales of $141.5 billion vs. the consensus estimate of $138.3 billion. However, bottom-line results came in way below expectations; Walmart reported quarterly EPS of $1.30 vs. the Zacks Consensus EPS Estimate of $1.46.

Following the quarterly reports, shares of both companies fell quite extensively. A key takeaway here is that retailers have experienced increased demand in the face of surging inflation, which supports the top line of these companies. However, the bottom line is where the pain has been most significant – margins have been impacted extensively by rising freight costs and supply-chain issues.

Bottom Line

While the top and bottom-line estimates forecast year-over-year growth, I think investors are better off keeping their distance from DLTR, and there are several reasons why.

Retailers have shown us repeatedly throughout this earnings season that their margins had been compressed quite extensively from higher freight costs and supply-chain bottlenecks. These issues are likely to persist throughout FY22.

Free cash flow yield has declined dramatically over the last year, and shares have recently found weakness following other retailers’ quarterly results.

Additionally, the most significant reason is that the company carries a Zacks Rank #4 (Sell) paired with a negative ESP score heading into tomorrow, which means that the odds of an EPS beat are no longer in investors’ favor.

A robust quarterly report is definitely not out of the picture, but as we’ve seen from other retailers, margins have been impacted significantly, and the safer play is on the sidelines.


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