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Dollar Tree Trims Family Dollar Units to Sharpen Its Profits

Asit Sharma, The Motley Fool

Dollar-store conglomerate Dollar Tree (NASDAQ: DLTR) signaled a more aggressive posture in turning around the fortunes of its Family Dollar brand in its fiscal fourth-quarter report (the three months ended Feb. 3, 2019), issued Wednesday before the markets opened. The company announced the closure and/or rebranding of nearly 600 Family Dollar locations in fiscal 2019. It also recorded a significant charge against earnings to impair a portion of the goodwill booked upon its acquisition of the Family Dollar chain in July 2015.

Please note that all comparative numbers that follow refer to the prior-year quarter (the fourth quarter of fiscal 2017).

Dollar Tree: The raw numbers

Metric Q4 2018 Q4 2017 Change (Year Over Year)
Revenue $6.2 billion $6.4 billion (3.1%)
Net income ($2.3 billion) $1.0 billion N/A
Diluted earnings per share ($9.66) $4.37 N/A

Data source: Dollar Tree. N/A = Not applicable; difference too great to be meaningful. 

What happened with Dollar Tree this quarter?

  • The current quarter included 13 weeks versus 14 weeks in the fourth quarter of 2018. Adjusting for the extra week in the comparable period, Dollar Tree's sales improved by 4.2% in the last three months.
  • Same-store sales advanced by 3.2% in the Dollar Tree segment and by 1.4% in the Family Dollar segment, for a consolidated increase of 2.4%.
  • The company opened 143 new stores during the quarter and expanded or relocated an additional 14 stores. In its ongoing effort to improve Family Dollar operations, the company shuttered 84 Family Dollar stores and rebannered five Family Dollar locations to Dollar Tree stores. Ten Dollar Tree units were closed during the period.
  • Dollar Tree announced that it would close 390 Family Dollar locations in 2019 and rebanner 200 stores from Family Dollar to the Dollar Tree brand. This is layered on an existing goal of renovating 1,000 Family Dollar stores in 2019. The company plans to open 200 new Family Dollar units this year.
  • Dollar Tree recorded a $2.73 billion impairment charge against goodwill to write down the value of Family Dollar on its books. While this writedown sunk net income and earnings per share for the quarter, it represents a realistic reset of the fair value of the Family Dollar brand.
  • The company also recorded a $40 million SKU (stock-keeping unit) rationalization (i.e. reduction) reserve charge on Family Dollar inventory.
  • Dollar Tree's gross margin dipped by 220 basis points, to 30.8%, which management attributed to higher markdown costs, the $40 million SKU rationalization reserve charge, and higher freight, inventory shrinkage, distribution, and occupancy costs.
  • Dollar Tree informed investors that it's settled on a working store model for new Family Dollar stores and renovated units dubbed "H2." The H2 format incorporates an improved merchandise selection and also features $1.00 price point merchandise from the Dollar Tree brand.
  • Management also announced that it will begin a test of multiple price points within its Dollar Tree business (which, unlike Family Dollar, adheres to a $1.00 price point in its stores). This can be seen as a tacit nod to recent pressure from activist shareholders who have called for an expansion of Dollar Tree's price points as a way to increase the company's operating margin.
Illustration of a tree with dollar signs in the place of leaves.

Image source: Getty Images.

What management had to say

In Dollar Tree's earnings press release, CEO Gary Philbin expressed confidence that the numerous improvement initiatives at Family Dollar would bear fruit and eventually supplement the momentum of the Dollar Tree brand:

Our Dollar Tree business has continued to perform extremely well. It's a concept our customers love, as validated by our streak of 44 consecutive quarters of comp sales growth. We are confident we are taking the appropriate steps to reposition our Family Dollar brand for increasing profitability as business initiatives gain traction in the back half of fiscal 2019. Improving the consistency of execution and optimizing our real estate portfolio will contribute to a meaningful improvement in our shoppers' in-store experience and store traffic. We believe we are well-positioned to capture the significant opportunity ahead of us as we focus on creating and driving value for our shareholders.

Looking forward

Dollar Tree released forward guidance alongside its earnings on Wednesday. In the first fiscal quarter of 2019, the organization expects sales of $5.74 billion to $5.85 billion, which at the midpoint will mark an improvement of 4.4% over the $5.55 billion in sales chalked up in the first quarter of fiscal 2018.

For the full year, Dollar Tree is targeting sales of $23.45 billion to $23.87 billion, against $22.82 billion booked in fiscal 2018. Same-store sales are expected to rise in the low single digits, and total store square footage is expected to increase by 1%.

The company anticipates that diluted earnings per share will land between $4.85 and $5.25. This range includes an impact of $0.31 from further optimization initiatives and charges, as well as $0.18 from an expected higher effective tax rate versus 2018.

Management advised investors that profits would be spread unevenly throughout the year -- the company is still knee-deep in improvement initiatives and forecasts that earnings won't gain significant traction until the back half of fiscal 2019.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.