Dollar Tree Q3 Earnings Beat Estimates, Ups Fiscal '14 View

Dollar Tree Inc. (DLTR - Analyst Report) came up with better-than-expected results for third-quarter fiscal 2014, wherein both its top and bottom lines beat the Zacks Consensus Estimate and also registered significant year-over-year growth.

The discount variety store operator’s adjusted earnings of 69 cents per share for the quarter were nearly 19% higher than the year-ago comparable quarter’s earnings of 58 cents. Adjusted earnings also surpassed the Zacks Consensus Estimate of 65 cents per share.

Dollar Tree, Inc - Earnings Surprise | FindTheBest

Adjusted earnings for the reported quarter exclude a charge of 5 cents per share related to costs associated with the pending acquisition of Family Dollar Stores Inc. (FDO - Analyst Report). Including the same, Dollar Tree’s earnings came in at 65 cents per share, up 12% year over year.

Quarterly Details

Revenues increased 11.2% on a year-over-year basis in the quarter to $2,095.2 million and came ahead of the Zacks Consensus Estimate of $2,065 million. Comparable-store sales (comps) increased 5.9% compared with a 3.1% increase recorded in the prior-year quarter.

Dollar Tree's quarterly gross profit rose approximately 9.9% year over year to $725.3 million, while gross margin contracted 40 basis points (bps) to 34.6%. The year-over-year decline in gross margin was mainly due to a rise in freight cost.

Adjusted selling, general and administrative (SG&A) expenses increased 7.8% to $491.3 million. However, as a percentage of revenues, it contracted 80 bps year over year to 23.4%.The decline in SG&A as a percentage of sales was driven by strong comps growth and efficient expense management that led to lower store operating costs.

Adjusted operating income for the quarter escalated 14.5% to $234 million. As a percentage of sales, it expanded 40 bps to 11.2%, representing a record third-quarter operating margin, 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 $407.6 million compared with cash balance of $147.1 million at the end of third-quarter fiscal 2013.

Merchandise inventories were $1,304.9 million compared with $1,237.4 million as of Nov 2, 2013. During the first three quarters of fiscal 2014, the company’s capital expenditure was $254.4 million as against $284.1 in the prior-year period.

Store Update

In the quarter, the company further expanded its store network by opening 117 stores, expanding or relocating 18 stores, while it shut down 1 store. Retail selling square footage grew 6.8% year over year to 45.8 million in the quarter.

Looking Ahead

Following the third-quarter results, the company initiated its fourth-quarter guidance and raised its sales and earnings forecast for fiscal 2014.

Dollar Tree now anticipates sales for the fiscal to come in the range of $8.52–$8.58 billion as compared with the earlier anticipation of $8.44–$8.55 billion. Moreover, the company narrowed its previously stated earnings per share guidance range for the fiscal. It now anticipates earnings to come in the range of $2.97–$3.04 per share against $2.94–$3.06 projected earlier.

The company’s earnings guidance for fiscal 2014 includes 7 cents per share of acquisition-related charges as compared with the previously anticipated charges of 2 cents per share.

For the fourth quarter, Dollar Tree expects total sales to be in the range of $2.39–$2.46 billion on the back of low-single digit comps growth. Further, the company anticipates earnings in the range of $1.07–$1.14 per share, excluding acquisition related expenses in the upcoming quarter.

Dollar Tree is considered to be one of 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, whereas increasing back-haul opportunities at the same time.

Dollar Tree currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail space are L Brands Inc. (LB - Analyst Report) and Zumiez Inc. (ZUMZ - Analyst Report), both carrying a Zacks Rank #2 (Buy).


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