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Why Is Dollar Tree (DLTR) Down 3.7% Since Last Earnings Report?

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Zacks Equity Research
·5 min read
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It has been about a month since the last earnings report for Dollar Tree (DLTR). Shares have lost about 3.7% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Dollar Tree Q3 Earnings & Sales Top Estimates

Dollar Tree reported robust third-quarter fiscal 2020 results, wherein earnings and sales surpassed the Zacks Consensus Estimate and improved year over year. The company also reported robust same-store sales (comps) across both formats.

It did not update its outlook for fiscal 2020, given the expectations of continued volatility and uncertainty related to the coronavirus pandemic.

However, the company notes that the initial trends in the fiscal fourth quarter have been favorable, with comps at both banners tracking better than the third quarter. Going forward, the company remains focused on opening new stores, improving store productivity, increasing operating efficiencies, generating free cash flow and repurchasing shares.

Quarter in Detail

Dollar Tree’s earnings advanced 28.7% year over year to $1.39 per share and surpassed the Zacks Consensus Estimate of $1.15.

Consolidated net sales rose 7.5% to $6,177 million and surpassed the Zacks Consensus Estimate of $6,113 million. Enterprise same-store sales (comps) grew 5.1%. Comps growth was backed by a 6.4% improvement in Family Dollar stores and a 4% rise in Dollar Tree. Notably, this was the strongest comps performance in the past ten quarters for the Dollar Tree segment.

Quarterly gross profit improved 12.9% year over year to $1,924.4 million, while gross margin expanded 150 bps to 31.2%. The expansion was mainly a result of lower merchandise costs, including freight, leverage on occupancy costs due to robust comps, lower markdowns and better shrink, partly negated by higher distribution costs. The rise in distribution costs included $11.4 million of pandemic-related payroll costs. Notably, gross margin improved 70 bps at Dollar Tree and 230 bps at Family Dollar segments.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, increased 20 bps to 23.7% due to incremental pandemic-related costs of $35.3 million, which primarily related to the payment of premium wages to frontline workers, field management bonuses, and store cleaning and PPE supplies.

Operating income advanced 29.9% to $465.5 million, while operating margin expanded 130 bps to 7.5%. Dollar Tree’s fiscal third-quarter operating income included $46.3 million of additional operating costs related to the coronavirus outbreak. Segment-wise, the company incurred additional costs of $28.6 million at Dollar Tree, $17.4 million at Family Dollar, and $0.3 million for Corporate, Support and Other. Notably, operating margin improved 50 bps at Dollar Tree, and 250 bps at Family Dollar segments.

Balance Sheet

Dollar Tree ended the quarter with cash and cash equivalents of $1,118.3 million. In third-quarter fiscal 2020, the company repaid the remaining $500 million on its revolving credit facility. It also plans to repay $300 million in legacy Family Dollar note, which is due in February 2021.

Net merchandise inventories increased 2.3% to $3,792.3 million. Moreover, it had net long-term debt (excluding current maturities) of $3,225.3 million and shareholders’ equity of $6,961.1 million as of Oct 31, 2020.

In third-quarter fiscal 2020, the company resumed its previously suspended share repurchase program and bought back 2,154,304 shares worth $200 million. Currently, it has nearly $600 million remaining under its share-buyback plan.

The company expects to incur capital expenditure of about $1 billion for fiscal 2020.

Store Update

In third-quarter fiscal 2020, Dollar Tree opened 143 stores, expanded or relocated 34 outlets, and shuttered 16 stores. It also completed the renovation of 371 Family Dollar stores to the H2 format. As of Oct 31, 2020, the company operated 15,606 stores in 48 states and five Canada provinces.

Dollar Tree now plans to open 480 stores in fiscal 2020. Additionally, it expects to complete 750 Family Dollar H2 renovations in fiscal 2020. The company currently plans to renovate about 1,250 Family Dollar stores in fiscal 2021.

Additionally, Dollar Tree plans to expand its Dollar Tree Plus! offering to nearly 500 stores, starting spring 2021. The company started testing this multi-price initiative in mid-2019 through the introduction of multi-price assortments in more than 100 stores in Southwestern markets.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 8.17% due to these changes.

VGM Scores

At this time, Dollar Tree has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile 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 trending upward for the stock, and the magnitude of these revisions looks promising. 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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