Dollar Tree (DLTR) Q2 Earnings Increase Y/Y, Miss Estimates

Yesterday, Dollar Tree Inc. DLTR came up with mixed results for second-quarter fiscal 2014, wherein its top and bottom lines registered a significant year-over-year growth but its earnings per share fell short of the Zacks Consensus Estimate.

The discount variety store operator's adjusted earnings of 61 cents per share for the quarter were 8.9% higher than the year-ago comparable quarter's earnings of 56 cents. However, adjusted earnings were below the Zacks Consensus Estimate of 65 cents per share.

Adjusted earnings for the reported quarter include a charge of 2 cents per share related to costs associated with the pending acquisition of Family Dollar Stores Inc. FDO. Including the same, Dollar Tree's earnings came in at 59 cents per share, up 5.4% year over year.

Quarterly Details

Revenues increased 9.5% on a year over year basis in the quarter to $2,031.1 million and came ahead of the Zacks Consensus Estimate of $2,011 million. The improvement was driven by robust sales in both consumables and discretionary products.

Product categories that excelled in the quarter included pet supplies, hardware, household products, food, electronics and party.

Comparable store sales (comps) increased 4.5% on a constant currency basis primarily driven by improved traffic, coupled with a rise in average ticket. Including the currency translation impact comps for the quarter registered growth of 4.4% in the quarter.

Dollar Tree's quarterly gross profit rose approximately 7% year over year to $694.1 million, while gross margin contracted 80 basis points (bps) to 34.2%. The year-over-year decline in gross margin was mainly due to a 30 bps reduction in merchandise margin, 40 bps rise in freight cost and the balance due to increased investments in higher-value products.

Adjusted selling, general and administrative (SG&A) expenses increased 7.6% to $481.6 million. However, as a percentage of revenues, it contracted 40 bps year over year to 23.7%.

Adjusted operating income for the quarter escalated 5.6% to $212.5 million. However, as a percentage of sales, it contracted 40 bps to 10.5% primarily due to reduced gross margin, partially offset by lower SG&A expenses as a percentage of revenue.

Balance Sheet and Capex

Dollar Tree ended the quarter with cash and cash equivalents of $467.7 million compared with cash balance of $413.7 million at the end of second-quarter fiscal 2013.

Merchandise inventories were $1,084 million compared with $1,018.3 million as of Aug 3, 2013. During the first half of fiscal 2014, the company spent $160.2 million on capital expenditure as against $199.6 million spent in the prior-year period.

Share Repurchase

In Sep 2013, the company had announced a $2 billion share repurchase program. Out of the $2 billion, the company planned to repurchase $1 billion worth of stocks through accelerated share repurchase ASR program.

In the second quarter, the company received 1.2 million shares, marking the completion of the ASR program. In total, the company has bought back about 18.1 million shares under this program. Looking forward, the company has now $1 billion remaining under its normal share repurchase program.

Store Update

In the quarter, the company further expanded its store network by opening 90 stores, expanding or relocating 20 stores, while it shut down 4 stores. Retail selling square footage grew 6.8% year over year to 44.8 million in the quarter.

Update on Family Dollar Acquisition

Dollar Tree on Jul 28 announced that it has strategically agreed to acquire Family Dollar in a cash and stock transaction valued at approximately $9.2 billion. The acquisition, which is expected to conclude by early 2015, will enhance the buying power of the pair, providing better negotiating terms against suppliers. The combined company will be able to offer broader and multiple assortments at more compelling prices. Moreover, the transaction will help in achieving operational and distribution efficiencies as well as cost synergies.

However, on Aug 18, Dollar General Corporation DG made a higher bid of $9.7 billion to acquire Family Dollar. But Dollar General's bid was rejected on the ground of antitrust related issues.

Looking Ahead

Looking at the second-quarter results and the pending acquisition of Family Dollar, Dollar Tree has adjusted its sales and earnings per share guidance for fiscal 2014, while keeping other projections unchanged.

The company raised and narrowed its sales outlook for fiscal 2014. Dollar Tree now anticipates sales for the fiscal to come in the range of $8.44–$8.55 billion as compared with the earlier anticipation of $8.37–$8.54 billion range. Moreover, comps are expected to grow in the band of low- to low-mid-single digit versus low single-digit comps growth anticipated previously.

The company has lowered the upper-end of its earnings per share guidance range for the fiscal. Dollar Tree now anticipates earnings to come in between $2.94–$3.06 per share against the earlier projected range of $2.94–$3.12.

Further, the company kept its other forecasts for the fiscal unchanged. It still expects capital expenditures of nearly $350–$360 million for fiscal 2014, toward opening of new stores and remodeling of existing stores. Depreciation and amortization expenses are projected to range from $200 million to $210 million for fiscal 2014. Tax rate for fiscal 2014 it is expected to be 38.3%.

In fiscal 2014, the company plans to open nearly 375 new stores and relocate 75 stores for a total 450 projects across the U.S. and Canada. Square footage is expected to augment 7% year over year in fiscal 2014.

Apart from updating fiscal 2014 outlook, the company initiated guidance for the third quarter. For the third quarter, Dollar Tree expects total sales to be in the range of $2.02–$2.07 billion on the back of low- to mid-single digit comps growth. Further, the company anticipates earnings in the range of 61–66 cents per share, excluding acquisition related expenses in the upcoming quarter.

Dollar Tree is considered among the best-positioned dollar store concepts, especially with its evolving multi-price point chain. We believe that the company is doing a commendable job internally in managing controllable inputs, while increasing back-haul opportunities at the same time.

Dollar Tree currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the discount retail space is Burlington Stores, Inc. BURL carrying a Zacks Rank #1 (Strong Buy).

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