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Dollar Tree (DLTR) Stock Dips Despite Q2 Earnings & Sales Beat

Dollar Tree, Inc. DLTR has 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.

Despite the robust second-quarter fiscal 2020 performance, the company’s shares declined nearly 4.2% in the pre-market session. Shares of this Zacks Rank #3 (Hold) company have gained 6.8% in the past three months compared with the industry's 9.1% growth.

 

 

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.

Dollar Tree, Inc. Price, Consensus and EPS Surprise

 

Dollar Tree, Inc. Price, Consensus and EPS Surprise

Dollar Tree, Inc. price-consensus-eps-surprise-chart | Dollar Tree, Inc. Quote

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 (SG&A) 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.

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Costco Wholesale Corporation COST currently has a long-term expected earnings growth rate of 8.4% and a Zacks Rank #2 (Buy).

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