Dollar Tree's Q3 Margins Disappoint Analysts, Yet They Maintain Bullish Ratings

While comparisons were solid, Dollar Tree, Inc. DLTR reported its third-quarter margins below Street’s expectations and lowered its full-year guidance.

Dollar Tree Earnings And Guidance

Dollar Tree reported third-quarter earnings of $1.08 per share, missing the consensus estimate of $1.13. The shortfall resulted from higher-than-expected pressure on the company’s gross margin, which contracted by 60 basis points, caused by higher freight expenses, mix shifts to consumables, elevated distribution and occupancy costs and markdowns.

Consolidated same-store sales of 2.5% were in-line with expectations, with Family Dollar’s comps growing 2.3% and Dollar Tree’s up 2.8%.

Management reduced the full-year earnings guidance range from $4.90-$5.11 to $4.66-$4.76 per share.

What Analysts Are Saying About Dollar Tree

Analyst Scot Ciccarelli of RBC Capital Markets expects “some” rebound in Dollar Tree’s margin in 2020. He explained that the company’s third-quarter margin was affected by various factors, many of which “should ease.”

Citing Family Dollar’s improved sales momentum and the expected rebound in Dollar Tree’s margin, the analyst said that the selloff in stock following the earnings report was “excessive.” He maintained an Outperform rating, while reducing the price target from $127 to $106.

In a separate note, UBS analyst Michael Lasser said that the third-quarter results “served as a reminder” of Dollar Tree’s turnaround being uneven and execution inconsistent.

Despite this, the assets had “considerable value that can be unlocked,” given the sales momentum at both the company’s banners, Lasser wrote.

He expressed his optimism regarding Dollar Tree’s steady top line momentum to result in margin improvements going ahead. Lasser reiterated a Buy rating, while lowering the price target from $120 to $108.

Analyst Robert Ohmes of Bank of America said that margin headwinds could continue in the near term. He added, however, that results would improve as the company executes on its turnaround initiatives.

Ohmes maintained a Buy rating for Dollar Tree, while reducing the price target from $125 to $105.

Dollar Tree Price Action

Shares of Dollar Tree had recovered slightly to $94.55 at the time of publishing on Wednesday.