The leading North American discount stores operator Dollar Tree (DLTR, Financial) reported its earnings on August 21. Results were a mixed bag as sales exceeded analysts’ expectations although earnings missed it. The company operates stores under the names of Dollar Tree, Deal$ and Dollar Bills and offers fabulous discounts. Let’s take a sneak peek into the major highlights of the second quarter and assess the performance of the company.
Higher comparable store sales boosted revenue
Consolidated net sales jumped 9.5% to $2.03 billion this quarter, with same store sales improving 4.5%. According to the Chief Executive Officer Bob Sasser, major categories like pet supplies, hardware, household products, and food items performed well during the quarter. Same store sales climbed due to increase in store traffic and were also influenced by a higher customer spending rate. Revenue for the quarter also topped street expectations of $2.01 billion.
This was an exciting part to watch in the results, as the largest discount retailer Wal-Mart (WMT, Financial) saw flat same-store sales this quarter. Thus, Dollar Tree’s performance can be stated to be better off than its immediate contender. Also, this quarter witnessed the strongest growth in comparable store sales for Dollar Tree within the past two years.
Acquisition could boost revenue further
Currently, the company is in a bidding war with rival Dollar General Corp. (DG, Financial) to acquire Family Dollar (FDO, Financial). Very recently, Family Dollar rejected the all-cash takeover bid placed by Dollar General worth $9 billion and hinted to accept the $8.5 billion bid placed by Dollar Tree.
If the deal materializes, Dollar Tree could turn into a massive retail chain of over 13,000 stores. It might also have an upper hand over Wal-Mart, which has already been suffering from strict retail spending in the U.S. and a preference shift from physical shopping toward online shopping.
The merger is expected to conclude by early 2015 and would create cost synergies worth $300 million by the end of 2018. Such synergies could help the dollar chain pass on some savings to its customers.
Earnings have taken a beating
Earnings per share were lower than expected, weighed down by expenses of $7.5 billion related to the proposed acquisition of Family Dollar. Net income including such acquisition costs stood at $121.5 million or $0.59 per share, up 5.4% from that reported in the comparable quarter of the previous year. Barring acquisition-related costs, adjusted net income for the quarter was $126.1 million or $0.61 per share.
The earnings per share excluding the special items fell short of Thomson Reuters’ forecast by $0.03 per share.
Going ahead
Dollar Tree opened 90 stores, shut down 4 and expanded or relocated 20 stores in the second quarter. Retail selling square footage increased 6.8% to 44.8 million square feet from last year. Looking ahead into the third quarter, the management is upbeat on the growth potential and estimates earnings to be in the range of $0.61 to $0.66 per share. Sales are expected in the range of $2.02 billion to $2.07 billion for the third quarter, based on single-digit positive comparable store sales. Diluted earnings are expected in the range of $0.61 to $0.66 per share.
The earnings guidance for the fiscal year has been reduced to a range of $2.94 to $3.06 per share from $2.94 to $3.12 per share estimated earlier, to reflect higher freight charges and restricted spending behavior. However, anticipating higher comparable store sales and square footage growth, the revenue range has been increased from $8.37 billion to $8.54 billion to $8.44 billion to $8.55 billion for the entire fiscal.
Final thoughts
Dollar Tree is on an acquisition spree for continuing its ride on the growth trajectory and to be ahead of its chief rivals – Wal-Mart and Dollar General. The company is optimistic on the upcoming quarters given increase in same store sales and growing store footage. Although growing cost will remain a challenge, synergies from the probable Family Dollar buyout and growing geographical reach could take Dollar Tree to a new height.
