Dollar Tree Shares Surge After Q1 Earnings Beat Expectations

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Dollar Tree Shares Surge After Q1 Earnings Beat Expectations

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What happened?

Dollar Tree Inc. (NASDAQ: DLTR) shares jumped 3.4% in Thursday premarket trading after the discount retailer reported first-quarter earnings and sales that beat expectations. Dollar Tree stock is down 7% for the year to date while the S&P 500 index has fallen 6% for the period.

Shares of Dollar Tree closed up 11.55% Thursday after the retailer announced earnings before the market opened.

So what?

Dollar Tree, on 28th May, posted better than expected first-quarter earnings and sales as consumers stocked up on essentials. Dollar Tree, which bought Family Dollar in 2015, benefited in Q1 from a surge in consumer demand for stay-at-home essentials as state lockdowns to mitigate the spread of the coronavirus took effect. It also said it is seeing strong momentum in its business in the early fiscal second quarter.

In the wake of COVID-19, consumers are being more frugal. A working study at Columbia Business School revealed how U.S. households are spending stimulus checks. Low and middle-income level households are spending their checks primarily on non-durable goods like food, pharmacies, supermarkets, with few expenditures on durable goods like appliances and electronics. The combination of frugality alongside the demand for non-durable goods channels demand into a specific market sector: discount retailers.

The parent company of Dollar Tree and Family Dollar said it now expects to open 500 new stores in fiscal 2020 (325 Dollar Tree stores and 175 Family Dollar stores), compared to its original plan of 550 new stores (350 Dollar Tree stores and 200 Family Dollar stores). The timing for completion of new store openings is likely to be deferred. It also expects to complete 750 Family Dollar renovations in fiscal 2020 compared with its initial guidance of 1,250 renovations.

The discount retailer reported that its net income totaled $247.6 million, with adjusted earnings per share of $1.04, for the quarter ended May 2, down from $267.9, $1.12 per share, in the same period a year ago. Analysts had expected earnings per share of $0.85. Dollar Tree had $73.2 million in operating costs for the COVID-19 pandemic amid expenses for supplies, wage premiums, and other items.

Overall revenue increased by 8.2% to $6.29 billion in the quarter, which was well ahead of expectations of $6.11. Total same-store sales increased by 7.0%. Same-store sales for Family Dollar increased by 15.5%. Dollar Tree’s same-store sales decreased by 0.9%. The most negatively impacted categories – party, candy, and Easter – affected Dollar Tree’s overall comp for the quarter by approximately 490 basis points, said Mike Witynski, enterprise president.

Dollar Tree Revenue by Segment

Overall gross margin fell from 29.7% to 28.5% as sales mix shifted to lower-margin items and the company absorbed the impact of last year’s tariffs, though it gained 40 basis points of leverage on overhead operating costs due to the increase in sales.

Operating income fell from $385.5 million to $365.9 million as the company had $73.2 million in incremental operating expenses related to COVID-19. That led to earnings per share slipping from $1.12 a year ago to $1.04, but that was better than estimates of $0.91.

The company ended the quarter with $1.76 billion in cash on its balance sheet, including $750 million drawn on its revolving line of credit.

As of May 2, Dollar Tree operated 15,370 stores across 48 states and five Canadian provinces under the brands of Dollar Tree, Family Dollar, and Dollar Tree Canada.

“Following a volatile sales environment in the first quarter, I am extremely pleased with the momentum we are seeing in our business early in the second quarter,” stated CEO Gary Philbin. “At Family Dollar, we are seeing continued sales strength with improvements in our discretionary categories. For Dollar Tree, we have seen a rebound on the discretionary side of the business following the Easter holiday, especially in crafts, graduation, stationery, Mother’s Day seasonal and balloons.”

Now what?

The company had pulled its guidance earlier in the year due to the uncertainty around the pandemic, but CEO Gary Philbin said the second quarter was off to a good start.

Philbin said he is leaning on Dollar Tree’s experience during the Great Recession for insight in navigating the economic devastation from the coronavirus. “It’s another data point where customers came to us, more foot traffic back in that time. Right now, it’s more about people are coming in and shopping with intent,” he explained.

Philbin noted that the enhanced unemployment benefits, which give people an extra $600 per week, are set to expire at the end of July. “So that will be another marker for us to watch how our customer responds,” he said.

“But I think we’re geared up with the right kind of values and convenience for these customers, many of them seeing us for the first time,” he said.

It will be interesting to see how estimates for the coming quarters and current fiscal year change in the days ahead. The current consensus EPS estimate is $0.74 on $5.96 billion in revenues for the coming quarter and $4.73 on $24.68 billion in revenues for the current fiscal year.

As a discount retailer, Dollar Tree should be in a position to capture market share in the coming months as consumers trade down and look for savings during a down economy.

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