Dollar Tree (DLTR) Up On Q1 Earnings Beat, Raises EPS View

After delivering negative earnings surprises for four straight quarters, Dollar Tree Inc. (NASDAQ:DLTR) bounced back with solid first-quarter fiscal 2016 results, thus starting the year on a positive note. Both the top and bottom lines beat estimates and improved year over year in the first quarter, which also encouraged management to raise its fiscal 2016 earnings outlook.

Shares of the company jumped 6.5% in the pre-market trading session following the announcement.

Dollar Tree had concluded its acquisition of Family Dollar Stores Inc (NYSE:FDO). in the second quarter of fiscal 2015, and is well on track to integrate the latter’s operations into its business. The giant arising from the combination of these two companies is likely to be strong enough to single-handedly counter competition from retail bellwethers such as Wal-Mart Stores Inc. (NYSE:WMT) and Dollar General Corporation (NYSE:DG) , in the dollar-discount store segment.

The company’s quarterly adjusted earnings of 89 cents per share surpassed the Zacks Consensus Estimate of 80 cents and jumped 25.4% year over year. Moreover, earnings exceeded the company’s expectations. On a reported basis, earnings soared considerably to 98 cents per share from 34 cents recorded in the year-ago quarter.

Quarterly Details

Consolidated net sales soared 133.6%, on a year-over-year basis, to $5,085.8 million in the quarter, falling within the company’s guidance range. Also, the figure surpassed the Zacks Consensus Estimate of $5,081 million. The robust top-line performance includes a contribution of $2,701.3 million from the Family Dollar segment. Sales were also backed by 2.3% growth in comparable-store sales (comps), on a constant currency basis, in the Dollar Tree segment.

Backed by improved customer count and average ticket, Dollar Tree’s comps grew 2.2%, barring the impact of Canadian currency adjustments.

The company’s quarterly gross profit surged 107.6% year over year to $1554.6 million. However, the adjusted gross margin contracted 380 basis points (bps) to 30.6%, mainly due to lower-margin product mix and a change in inventory accounting method – all at the Family Dollar segment.

Selling, general and administrative expenses contracted 140 bps to 22.3% of sales, mainly benefiting from lower payroll, corporate and operating costs. This was partly offset by a hike in store repair and maintenance costs coupled with depreciation.

Balance Sheet

Dollar Tree ended the quarter with cash and cash equivalents of $929.7 million, net merchandise inventories of $2,929.5 million, net long-term debt of $7,209.8 million, and shareholders’ equity of $4,669.6 million.

Store Update

Dollar Tree opened 171 outlets, expanded or relocated 66 outlets, and shuttered 19 outlets during the quarter.

Also, during the quarter, the company opened 3 old Family Dollar outlets as Dollar Tree outlets as part of its re-banner efforts. Moreover, the company converted 126 Deals stores to Dollar Tree outlets and 9 Deals stores to Family Dollar outlets in the quarter.

Looking Ahead

Management remains pleased with its first-quarter performance and remains on track with Family Dollar’s integration to fuel future growth. Consequently, the company raised its earnings outlook for fiscal 2016, alongside narrowing its sales outlook.

Based on the expectation that comps will grow in a low single-digit range in fiscal 2016, Dollar Tree now anticipates consolidated net sales for the fiscal to range from $20.79–$21.08 billion, compared with $20.76–$21.11 billion projected earlier. Earnings for fiscal 2016 are now envisioned in a range of $3.58−$3.80 per share, up from $3.35–$3.65 expected earlier.

For the second quarter of fiscal 2016, Dollar Tree expects total sales to be in the range of $5.03–$5.12 billion on the back of low single-digit comps growth. Further, earnings for the second quarter are envisioned in the band of 66–72 cents per share.

Zacks Rank

Dollar Tree currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the retail sector is Best Buy Co., Inc. (NYSE:BBY) , which carries a Zacks Rank #2 (Buy).

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