Dollar Tree (DLTR) Down 7.6% Since Last Earnings Report: Can It Rebound?


It has been about a month since the last earnings report for Dollar Tree (DLTR). Shares have lost about 7.6% 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 drivers.

Dollar Tree Earnings & Sales Beat Estimates in Q2

Dollar Tree reported second-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. Results benefited from an improvement in spending for discretionary items at Family Dollar stores, following the Easter holiday season. Additionally, its expanded Crafter’s Square assortments continue to perform very well.

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

Quarter in Detail

Dollar Tree’s earnings advanced 44.7% year over year to $1.10 per share and surpassed the Zacks Consensus Estimate of 89 cents.

Consolidated net sales rose 9.4% to $6,277.6 million and surpassed the Zacks Consensus Estimate of $6,230 million. Enterprise same-store sales (comps) grew 7.2%. Comps growth was backed by an 11.6% improvement in Family Dollar stores and a 3.1% rise in Dollar Tree.

Quarterly gross profit improved 16.2% year over year to $1,916.2 million, while gross margin expanded 180 bps to 30.5%. 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 mainly resulted from $11.4 million of pandemic-related payroll costs and $10.8 million of incremental tariffs.

Selling, general and administrative expenses, as a percentage of sales, increased 50 bps to 24.5% due to incremental pandemic-related costs of $123.5 million, which primarily related to the payment of premium wages to frontline workers, field management bonuses and store supplies.

Operating income advanced 39.4% to $374.9 million, while operating margin expanded 130 bps to 6%. The company’s fiscal second-quarter operating income included $134.9 million of additional operating costs related to the coronavirus outbreak. Segment-wise, the company incurred additional costs of $76.6 million at Dollar Tree, $57.1 million at Family Dollar, and $1.2 million for Corporate and Support. Further, the company incurred store damage, lost inventory, and other costs of $16.8 million, owing to civil unrest in certain communities in the fiscal second quarter. Segment-wise, the civil unrest charges included $11.7 million at Family Dollar and $5.1 million at Dollar Tree. Collectively, the pandemic-related and civil unrest costs for the reported quarter were $151.7 million (49 cents per share).

Balance Sheet

Dollar Tree ended the quarter with cash and cash equivalents of $1,750.3 million, comprising $500 million drawn on its revolving credit facility. Notably, the company repaid $250 million on its line of credit during the fiscal second quarter. Moreover, it had net merchandise inventories of $3,275.7 million, net long-term debt (excluding current maturities) of $3,224.3 million and shareholders’ equity of $6,813.6 million as of Aug 1, 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. However, it expects to incur capital expenditure of about $1 billion for fiscal 2020.

Store Update

In second-quarter fiscal 2020, Dollar Tree opened 131 stores, expanded or relocated 22 outlets, and shuttered 26 stores. It also completed the renovation of 76 Family Dollar stores to the H2 format. As of Aug 1, 2020, the company operated 15,479 stores in 48 states and five Canada provinces.

Moreover, the company reiterated its plan to open 500 stores in fiscal 2020, including 325 Dollar Tree and 175 Family Dollar outlets. Additionally, it expects to complete 750 Family Dollar H2 renovations in fiscal 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, 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 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

Estimates have been broadly 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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