Dollar Tree (DLTR) Q3 Earnings and Sales Outperform, High Costs Hurt – Nov 22, 2022

Dollar Tree, Inc. πŸ‡§πŸ‡·DLTR πŸ‡§πŸ‡· Free Report) reported fiscal third quarter 2022 results, in which sales and earnings outperformed the Zacks Consensus Estimate and our estimate. The top and bottom lines also improved year over year. Results benefited from continued demand for the company’s products, offset by inflationary pressures and an unfavorable product mix due to shifting demand towards low-margin consumer goods.

The company remains optimistic about its top-line performance in fiscal 2022. Therefore, it has raised its fiscal 2022 sales view. Despite strong sales trends in both banners, the company expects increased demand for consumables and inflationary costs affect margins and results in the short term. Consequently, it provided a bleak earnings outlook for fiscal 2022.

DLTR shares were down 1.9% in premarket trading on Nov. 22 despite earnings and earnings growth in the third quarter of fiscal 2022. The company likely witnessed poor performance due to continued cost pressures and a Weak earnings view for fiscal 2022 Shares in this Zacks Rank #3 (Hold) company were up 17.6% YTD versus an industry decline of 7.8%.


Image source: Zacks Investment Research

Quarter in Detail

Dollar Tree earnings improved 25% year-over-year to $1.20 a share, beating both the Zacks consensus estimate of $1.17 and our estimate of $1.14. The bottom line growth can be attributed to robust top line growth as well as improved margins.

Consolidated net sales advanced 8.1% year-over-year to $6,939.9 million and beat the Zacks Consensus Estimate of $6,839 million and our estimate of $6,833.7 million. Corporate same-store sales (comps) improved 6.5% year-over-year. For the Dollar Tree banner, comps were up 8.6%, while the same for the Family Dollar banner improved 4.1%. After adjusting for the impacts of currency fluctuations, Dollar Tree brand offsets were up 8.5%.

Comps at Dollar Tree benefited from a double-digit increase in average ticket, partially negated by a decline in traffic. Family Dollar compensation was aided by increases in fares and traffic.

Gross profit increased 17.5% year-over-year to $2,071.5 million, while gross margin expanded 240 bps to 29.9%. Improved initial mark-on gains and leverage on distribution and occupancy costs helped gross margin. This was partially offset by higher markdowns and retractions, inflationary cost pressures and unfavorable product mix related to a shift to lower margin consumables. Gross margin expanded 520 bps to 35.4% in the Dollar Tree banner and contracted 100 bps to 23.4% in the Family Dollar segment.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, increased 170 bps to 24.4%. The increase resulted from higher professional fees, increased store payroll and inventory clearing expenses, and inflationary pressures in many expense categories such as utilities and higher repair and maintenance costs.

While operating profit increased 22.8% to $381.3 million, operating margin expanded 70 bps to 5.5%, driven by strong gross margin expansion and sales growth. On a segment basis, operating margin expanded 480 bps to 13.3% for Dollar Tree. Meanwhile, the Family Dollar segment posted an operating loss of $18.4 million, compared to operating income of $88.6 million in the year-ago quarter.

balance sheet

Dollar Tree ended the third fiscal quarter with cash and cash equivalents of $439 million. Net merchandise inventories increased 31.1% year-over-year to $5,657.7 million. It had long-term net debt (excluding current maturities) of $3,420.4 million and shareholders’ equity of $8,275.3 million as of October 29, 2022.

The company repurchased 2,859,200 shares for $397.5 million in the third fiscal quarter of 2022, reflecting an average price of $139.04 per share. As of October 29, 2022, Dollar Tree has $1.85 billion remaining under its existing entitlement.

The company anticipates spending $1.2 billion on capital expenditures in fiscal 2022.

store update

In the third fiscal quarter of 2022, Dollar Tree opened 102 stores, expanded or relocated 20 outlets and closed 41 stores. The company completed the renovation of 309 Family Dollar stores to H2 or Combo Store formats. In addition, it expanded its multi-price offerings to an additional 199 Dollar Tree stores in the quarter. As of October 29, 2022, the company operated 16,293 stores across 48 states and five provinces in Canada.

Guidance

Dollar Tree has raised its sales outlook for fiscal 2022 as its efforts to develop assortment to drive consumable performance at Dollar Tree and initiatives to improve the value proposition at Family Dollar remain on track.

The company expects consolidated net sales of $28.14 to $28.28 billion, compared to the aforementioned $27.85 to $28.10 billion. It forecasts single-digit business growth for fiscal 2022, including high single-digit growth in the Dollar Tree segment and low single-digit growth in the Family Dollar segment. He expects square footage sales to increase 2.8% compared to the aforementioned 3.5% growth.

The company expects depreciation to be $770 million for the 2022 fiscal year. Interest expense is forecast at $127 million, while the effective tax rate is likely to be 23.7%.

Management forecast earnings in the lower half of the aforementioned $7.10 to $7.40 per share. The company noted that sales trends are strong in both banners. However, increased demand for consumables is likely to affect margins in the short term. This, along with ongoing inflationary cost pressures, resulted in a soft earnings outlook for fiscal 2022.

For the fourth quarter of fiscal 2022, Dollar Tree expects consolidated net sales of $7.54 to $7.68 billion, with corporate same-store sales growth in the mid-to-high single digits. This will include mid to high single digit growth in the Dollar Tree segment and low to mid single digit growth in the Family Dollar segment.

The company expects net interest expense of $30 million for the fiscal fourth quarter, with an effective tax rate of 24.3%.

Actions to consider

We highlight some of the best classified titles in the Retail – Wholesale sector, namely Technoglass πŸ‡§πŸ‡·TGLS πŸ‡§πŸ‡· Free Report), Ross Stores Inc. πŸ‡§πŸ‡·face πŸ‡§πŸ‡· Free Report) and general dollar πŸ‡§πŸ‡·DG πŸ‡§πŸ‡· Free Report).

Tecnoglass manufactures and sells architectural glass and windows and aluminum products for residential and commercial construction. TGLS currently boasts a Zacks Rank #1 (Strong Buy). The company has a surprise four-quarter earnings of 26.9% on average. You can see the full list of today’s Zacks #1 Rank actions hereπŸ‡§πŸ‡·

Zacks’ consensus estimate for Tecnoglass’ current year sales and EPS suggests growth of 40.5% and 76.4%, respectively, over figures reported in the prior year period. Shares in TGLS are up 9.6% year-to-date.

Ross Stores, a US discount clothing and home accessories retailer, currently carries a Zacks Rank #2 (Buy). ROST has an expected EPS growth rate of 10.5% for three to five years. ROST shares are down 1.7% year-to-date.

Zacks’ consensus estimate for Ross Stores sales and earnings per share (EPS) for the current year suggests declines of 3.9% and 14.5%, respectively, from figures reported in the prior year period. ROST has a surprise earnings over the last four quarters of 10.5% on average.

Dollar General, one of the largest discount retailers in the United States, currently has a Zacks rating of 2. DG has a four-quarter earnings surprise of 2.2% on average. The stock accumulates appreciation of 9.3% in the year.

The Zacks Consensus Estimate for Dollar General’s current year sales and EPS suggests growth of 10.8% and 13.8%, respectively, over numbers reported in the prior year period. DG has an expected EPS growth rate of 11.1% for three to five years.

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