Dollar Tree Swings to Profits on Family Dollar Acquisition

Retailer’s net sales jumped almost 66% to $5 billion in Q2 FY16

d1Deep-discount retailer Dollar Tree Inc. (NASDAQ: DLTR) announced its Q2 FY16 and H1 FY16 financial results on August 25th, 2016.

The Chesapeake, Virginia-based Company operates discount retail stores in the U.S. and Canada under two segments: Dollar Tree and Family Dollar.

The Dollar Tree segment offers merchandise at the fixed price of $1. It provides consumable merchandise, including candy and food, and health and beauty care products, as well as everyday consumables. This segment operates under the Dollar Tree, Dollar Tree Canada, Deals, and Dollar Tree Deals brands, as well as 10 distribution centers in the U.S. and 2 in Canada, and a store support center in Chesapeake, Virginia.

The Family Dollar segment offers consumable merchandise, including food, tobacco, health and beauty aids, household chemicals, hardware and automotive supplies, pet food and supplies. This segment operates under the Family Dollar brand, with 11 distribution centers, and a store support center in Matthews, North Carolina. Read more about Dollar Tree’s financial results below.

Q2 FY16 financial highlights

During Q2 FY16, Dollar Tree’s net sales jumped 65.9% to $5.00 billion from $3.01 billion in the prior year period, driven by incremental sales of $1.80 billion from Family Dollar stores, and sales from new Dollar Tree stores. Same-store sales increased 1.2% on a constant currency basis, compared to an increase of 2.7% in the prior-year period. Adjusted for the impact of Canadian dollar fluctuations, same-store sales increased 1.1%, driven by higher customer traffic and average ticket value.

Source: Company's Website
Source: Company’s Website

During Q2 FY16, Dollar Tree’s gross profit increased by $657.2 million, or 76.8%, to $1.51 billion, compared to $855.2 million in the prior year’s second quarter. The increase included $588.4 million of gross profit from Family Dollar and a 9.2% increase in Dollar Tree’s gross profit for the quarter. As a percent of sales, gross margin expanded to 30.3% compared to 28.4% in the prior year, which included a $60 million markdown expense related to product assortment rationalization and liquidations at Family Dollar.

During Q2 FY16, Dollar Tree’s selling, general, and administrative (SG&A) expenses amounted to 23.1% of sales compared to 24.3% of sales in the prior year’s second quarter. Excluding $17.7 million of acquisition-related costs from the prior year’s period, SG&A as a percentage of sales, improved to 23.1% from 23.7%, due to lower payroll and operating and corporate expenses, partially offset by higher store repairs and maintenance expenses and depreciation expense.

d3Operating income soared 189.5% to $357.2 million in Q2 FY16 compared to $123.4 million in the year-ago quarter. Operating income margin rose to 7.1% in the reporting quarter from 4.1% in the year-ago quarter, on account of an incremental $189.7 million of operating income in the Family Dollar segment, and a $44.1 million increase in operating income in the Dollar Tree segment.

Consequently, Dollar Tree swung to profits of $170.2 million in Q2 FY16, versus a loss of $98.0 million in the year-ago quarter. Diluted EPS during the reporting quarter increased to $0.72 versus $(0.46) in the year-ago period.

The Q2 FY16 results include 9 additional weeks of operations for the Family Dollar segment when compared to Q2 FY15, which included four weeks of operations following the acquisition on July 6th, 2015.

H1 FY16 financial highlights

For H1 FY16, Dollar Tree’s consolidated net sales jumped 94.3% to $10.08 billion from $5.19 billion in the year-ago period, on account of $4.50 billion in incremental net sales from Family Dollar stores and sales from new Dollar Tree stores. On a constant currency basis, same-store sales increased 1.7% during the reporting quarter. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 1.6%.

For H1 FY16, Dollar Tree’s gross profit soared $1.46 billion, or 91.2%, to $3.07 billion from $1.60 billion in the year-ago period. As a percentage of sales, gross margin decreased by 50 basis points to 30.4% compared to the prior year period.

Dollar Tree’s SG&A expenses were 22.7% of sales compared to 24.1% of sales in the year-ago period. Excluding $28.1 million of acquisition-related costs from H1 FY15, SG&A expenses as a percentage of sales improved to 22.7% from 23.5% during the reporting quarter.

In all, Dollar Tree swung to profits of $402.8 million in H1 FY16 versus a loss of $28.5 million in the year-ago period. Diluted EPS during the reporting period increased to $1.70 versus $(0.14) in the year-ago period.

Both Dollar Tree and its rival Dollar General Corp. (NYSE: DG) have bucked the trend of disappointing sales and softer demand for non-consumables, by reported sales growth and higher foot traffic on account of expanding their offerings of discretionary products such as seasonal party decorations, home goods, and beauty products.

Other highlights

Merger with Family Dollar creates retail behemoth:  Dollar Tree vaulted to the top spot among dollar stores by annual revenue when it acquired rival Family Dollar and its 8,200 stores for $8.5 billion in July 2015, overtaking rival Dollar General. d4The new entity that was created following the acquisition operates 14,129 stores across 48 states in the U.S. and 5 provinces in Canada, as of July 30th, 2016. The company will now be able to effectively compete with retail heavyweights such as Wal-Mart Stores Inc. (NYSE: WMT). Dollar Tree would be able to provide customers with products at a fixed price ($1 or less) under its banner and multi-price point under Family Dollar.

Moreover, the successful integration will enhance Dollar Tree’s ability to tap new markets, enhance its market share, improve its sales channel, and increase its store count. Apart from achieving operational and distribution efficiencies as well as cost synergies, Dollar Tree is looking to achieve annual cost savings of about $300 million by the end of the third year following the buyout, as a result of synergies in sourcing and procurement of products and services; banner optimization, corporate overheads, and optimization of its distribution and logistics networks.

Corporate restructuring: Dollar Tree announced on August 4th, 2016, that as part of its ongoing efforts to integrate its support functions through a shared services model, the Company will eliminate 370 positions at its Family Dollar store support center in Matthews, North Carolina. The shared services model is aimed at leveraging its back office functions to support both Dollar Tree and Family Dollar business segments. However, store operations and merchandising functions will remain separate functions.

Store count: During Q2 FY16, Dollar Tree opened 156 stores, expanded or relocated 52 stores, and closed 17 stores. Additionally, as part of its re-banner initiative, the Company opened 47 former Family Dollar store locations as new Dollar Tree stores. The Company also converted the remaining 32 Deals stores to Dollar Tree stores. Retail selling square footage at the end of the quarter was approximately 110.8 million square feet. Dollar Tree operated 14,129 stores across 48 states and 5 Canadian provinces as of July 30th, 2016, under the Dollar Tree, Family Dollar, and Dollar Tree Canada brands.

Guidance for full year FY16

For Q3 FY16, Dollar Tree estimates consolidated net sales to range from $5.02 billion to $5.10 billion, based on a low single-digit increase in same-store sales. Diluted EPS is estimated to be in the range of $0.76 per share to $0.82 per share.

For full year FY16, consolidated net sales are expected to range between $20.69 billion and $20.87 billion compared to the earlier guidance range of $20.79 billion to $21.08 billion. This estimate is based on a low single-digit increase in same-store sales, and 4.0% square footage growth. The Company now forecasts diluted EPS to range between $3.67 per share and $3.82 per share compared to its previous diluted EPS guidance range of $3.58 per share to $3.80 per share.

Stock Performance

d5Dollar Tree’s stock ended the day at $82.50, slipping 0.94%, at the close on Wednesday, September 7th, 2016, having vacillated between an intraday high of $83.02 and a low of $81.74 during the session. The stock’s trading volume was at 2,778,503 for the day. The Company’s market cap was at $19.46 billion as of Wednesday’s close.

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