Dollar Tree (DLTR) Misses Q2 Earnings & Sales; Stock Down

After delivering a positive earnings surprise in the preceding quarter, Dollar Tree Inc. (NASDAQ:DLTR) reverted to its negative surprise trend in second-quarter fiscal 2016 as both the top and bottom lines missed estimates. However, both sales and earnings improved substantially on a year-over-year basis. While the company lowered its sales outlook for fiscal 2016, it boosted its earnings projections for the fiscal.

Shares of the company tumbled about 7.3% in the pre-market trading session following the announcement.

The company’s quarterly adjusted earnings of 72 cents per share missed the Zacks Consensus Estimate of 73 cents but registered substantial 188% growth year over year. Also, earnings were at the higher end of the company’s guidance range. On a reported basis, the company posted earnings of 72 cents per share against a loss of 46 cents per share recorded in the year-ago quarter.

The company stated that second-quarter fiscal 2016 results included results of nine incremental weeks of operations for the Family Dollar segment versus the same period in fiscal 2015, which comprised four weeks of operations following the completion of acquisition on Jul 6, 2015.

Quarterly Details

Consolidated net sales surged 65.9% on a year-over-year basis to $4,996.3 million in the quarter, backed by an additional $1.80 billion sales contribution from the Family Dollar segment, together with robust sales from new Dollar Tree stores and a rise in comparable store sales (comps). However, the top line fell short of the company’s guidance range of $5.03–$5.12 billion and lagged the Zacks Consensus Estimate of $5,131 million.

Comps for the quarter grew 1.2%, on a constant-currency basis, backed by improved customer count and average ticket. Barring the impact of Canadian currency adjustments, comps rose 1.1%.

The company’s quarterly gross profit surged 76.8% year over year to $1,512.4 million, boosted by incremental $588.4 million gross profit for Family Dollar and a 9.2% rise in Dollar Tree’s gross profit. However, the gross margin expanded 190 basis points (bps) to 30.6%.

Adjusted selling, general and administrative expenses contracted 60 bps to 23.1% 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 $1,083.2 million, net merchandise inventories of $2,975.1 million, net long-term debt of $7,155.7 million, and shareholders’ equity of $4,856.9 million.

Store Update

Dollar Tree opened 156 outlets, expanded or relocated 52 outlets, and shuttered 17 outlets during the quarter.

Also, during the quarter, the company opened 47 old Family Dollar outlets as Dollar Tree outlets as part of its re-banner efforts. Moreover, it converted the remaining 32 Deals stores to Dollar Tree outlets.

Looking Ahead

Following the fiscal second-quarter results, Dollar Tree provided net sales and earnings guidance for the third quarter. Further, the company lowered its fiscal 2016 sales forecast, while raising its earnings guidance.

Management now projects net sales for fiscal 2016 in the band of $20.69–$20.87 billion versus $20.79–$21.08 billion expected earlier. Comps are expected to grow in the low single-digit range. Earnings per share are envisioned in the $3.67–$3.82 range for fiscal 2016 compared with $3.58–$3.80 anticipated earlier.

For the third quarter, sales are projected in the range of $5.02–$5.10 billion, with earnings of 76–82 cents. For the third quarter too, comps are expected to grow in the low single-digit range.

Zacks Rank

Dollar Tree currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the discount-retail industry include Burlington Stores Inc. (NYSE:BURL) , with a Zacks Rank #1 (Strong Buy) and Ross Stores Inc. (NASDAQ:ROST) , carrying a Zacks Rank #2 (Buy). Another well-ranked stock in the broader retail sector is Urban Outfitters Inc. (NASDAQ:URBN) , with a Zacks Rank #1.