Can Dollar Tree (DLTR) Q2 Earnings Beat Despite Soft Margins?

Dollar Tree, Inc. (NASDAQ:DLTR) is slated to release second-quarter fiscal 2019 results on Aug 29, before the market opens. In the preceding quarter, the company delivered a negative earnings surprise of 0.9%. However, it reported earnings beat in two of the trailing four quarters, the average beat being 0.4%.

Let’s see how things are shaping up prior to the earnings announcement.

How Are Estimates Faring?

The Zacks Consensus Estimate for the company’s fiscal second-quarter earnings is pegged at 86 cents, indicating a 25.2% decline from the figure reported in the year-ago quarter. Moreover, the consensus mark has moved down by a penny in the past 30 days. For quarterly sales, the consensus estimate stands at $5.72 billion, implying 3.6% growth from the prior-year quarter number.

Factors at Play

Dollar Tree is going through a rough phase, which was clear from its soft bottom-line results in the last reported quarter along with soft margins trend. The company posted dismal earnings in first-quarter fiscal 2019, wherein the bottom line missed the Zacks Consensus Estimate and fell year over year. Moreover, it reported the fifth straight quarter of soft gross and operating margin due to persistent cost pressures arising from higher domestic freight and investments in store wages.

Notably, lower initial markup at Family Dollar, increased domestic freight and distribution costs, a decline in the Family Dollar segment and rise in occupancy costs related to increased rent expenses for Family Dollar stores scheduled to close in 2019 impacted gross margin in the last reported quarter. Further, higher SG&A expenses, owing to operating and corporate expenses for the consolidation of store support centers, payroll costs linked to investment in store hourly payroll and higher legal fees, hurt operating margin in the same quarter. We expect the company’s second-quarter fiscal 2019 results to reflect pronounced impacts from the aforementioned costs, which should keep margins soft.

In addition to higher costs for the newly negotiated freight rates, the company expects that continued pressure on store payroll based on competitive markets, states increasing minimum wages and the completion of its ongoing initiatives will weigh on margins in fiscal 2019. Notably, Dollar Tree predicts domestic freight costs (as a percentage of sales) to increase in the first half of the fiscal year and then flatten out in the second half.

Moreover, the company narrowed its earnings view for fiscal 2019, after witnessing soft bottom line in the fiscal first quarter. It now estimates consolidated net sales of $23.51-$23.83 billion compared with the previously stated $23.45-$23.87 billion. Comps are anticipated to grow in a low-single digit along with nearly 1% rise in square footage. Earnings are envisioned to be $4.77-$5.07 per share compared with $4.85-$5.25 stated previously.

The company’s earnings guidance includes discrete expenses of about $95 million related to the Family Dollar store optimization initiative and store support center consolidation. Additionally, it includes $30-million (or 10 cents per share) store closure costs to be incurred in the fiscal second quarter as well as $15 million (or 5 cents per share) of import freight costs due to higher freight rates based on negotiations in April.

Moreover, the company estimates calendar shifts, relating to the anticipated six fewer selling days between Thanksgiving and Christmas, to affect sales in the fiscal fourth quarter. The estimated softness in fiscal 2019 might also result from some weakness in the fiscal second quarter.

Additionally, the company’s guidance reflects continued impacts of Section 301 tariffs of 25% on List 1, 2, and 3 goods. However, it does not include the potential tariffs on List 4 goods, which, if implemented, may impact its business.

Though the company’s near-term view looks grim, its initiatives like Dollar Tree Plus! test and store-optimization efforts are encouraging. Backed by a robust comps trend that reflects strength in Dollar Tree and Family Dollar banners, the company is likely to gain significantly. Management expects store-optimization measures to lift comps by up to 1.5%, after its implementation by the end of fiscal 2019. These efforts should aid results in the long run.

A Look at the Zacks Model

Our proven model does not conclusively predict that Dollar Tree is likely to beat earnings estimates in second-quarter fiscal 2019. This is because a stock needs to have — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Dollar Tree currently has a Zacks Rank #4 (Sell) and an Earnings ESP of -11.48%, which make surprise prediction unlikely. We caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Poised to Beat Earnings Estimates

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Caseys General Stores, Inc. (NASDAQ:CASY) presently has an Earnings ESP of +8.43% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Target Corporation (NYSE:TGT) currently has an Earnings ESP of +1.04% and a Zacks Rank #2.

Burlington Stores, Inc. (NYSE:BURL) has an Earnings ESP of +1.13% and a Zacks Rank #2 at present.

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