Dollar Tree’s Earnings More Than Doubles on Tax Benefits

Retailer’s net income surged 109.5%, or $89.7 million, to $171.6 million during Q3 FY16

d1Deep-discount retailer Dollar Tree Inc. (NASDAQ: DLTR) announced its Q3 FY16 financial results on November 22nd, 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 retailer operated 14,284 stores across 48 states and 5 Canadian provinces under the brands of Dollar Tree, Family Dollar, and Dollar Tree Canada as of October 29th, 2016.

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.

Q3 FY16 financial highlights

During Q3 FY16, Dollar Tree’s net sales grew by a mere 1.1% to $5.00 billion from $4.95 billion in the prior year’s period, driven by incremental sales from 325 Family Dollar stores that were divested following Q3 FY15, but still missing forecasts for $5.07 billion. Same-store sales increased 1.7% on a constant currency basis, compared to a 2.1% increase in the prior year’s same period. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 1.8%. The same-store sales growth, representing the Company’s 35th consecutive quarter of positive same-store sales, was driven by increases in comparable customer count and average ticket.

d2During Q3 FY16, Dollar Tree’s gross profit jumped 8.6% to $1.52 billion compared to $1.40 billion in the year ago same period. As a percentage of sales, gross margin increased to 30.4% compared to 28.3% in the prior year, driven by lower merchandise and freight costs. The prior year period included a $13-million markdown expenses for Family Dollar related to product assortment rationalization and planned liquidations, and $38.4 million for Family Dollar related to the amortization of the stepped-up inventory basis.

During the reporting quarter, selling, general, and administrative (SG&A) expenses were 23.6% of sales compared to 23.8% of sales in the prior year’s comparable quarter. Excluding $11.8 million of acquisition-related costs from the prior year’s same period, SG&A expenses as a percentage of sales remained consistent at 23.6%. Increases in store hourly payroll, as a percentage of sales, were offset by lower professional fees and lower depreciation expense, as a percentage of sales.

d3Operating income jumped 53.1% to $342.4 million compared to $223.7 million in the same period last year, as a result of a $61.2 million increase in operating income in the Dollar Tree segment, and a $57.5 million increase in operating income in the Family Dollar segment. As a result, operating income margin jumped to 6.8% from 4.5% in last year’s quarter. A lower tax rate and an expected one-time tax benefit of $21.4 million, or $0.09 per share, boosted Dollar Tree’s Q3 FY16 net income, which surged 109.5%, or $89.7 million, to $171.6 million, or $0.72 per share, versus $81.9 million, or $0.35 per share, in the year ago comparable period.

Segmental highlights

Dollar Tree segment: During Q3 FY16, this segment’s net sales increased to $2.46 billion from $2.27 billion in the year ago same period. Gross profit grew to $857.3 million from $772.2 million in the year-ago period, while operating income rose to $286 million from $224.8 million in the prior year’s comparable quarter. This segment ended the quarter with 6,320 stores spread over 54.4 million square footage, representing a growth of 8.2% Y-o-Y.

Family Dollar segment: During Q3 FY16, this segment’s net sales fell to $2.53 billion from $2.67 billion in the year-ago period. Gross profit grew to $663.2 million from $627.8 million in the year ago same period, while operating income rose to $56.4 million from a loss of $1.1 million in Q3 FY15. This segment ended the quarter with 7,964 stores spread over 57.6 million square footage, representing a decline of 2.9% Y-o-Y.

Other highlights

Repayment of debt: During the reporting quarter, Dollar Tree prepaid $343.2 million of its outstanding debt to reduce future interest costs. After adding back $0.09 per share of expenses related to its debt refinancing, operating performance of $0.81 per diluted share was near the top-end of its Q3 FY16 EPS guidance range of $0.76 to $0.82.

Cash balance: Dollar Tree ended the quarter with cash and cash equivalents of $733.8 million, net merchandise inventories of $3,273.9 million, net long-term debt of $6,938 million and shareholders’ equity of $5,047.7 million.

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 Q3 FY16, Dollar Tree opened 153 stores, expanded or relocated 39 stores, and closed 10 stores, ending the quarter with 14,284 stores. Additionally, as part of its re-banner initiative, the Company opened 42 former Family Dollar store locations as new Dollar Tree stores. Retail selling square footage was 112.0 million square feet, representing a growth of 2.2% Y-o-Y.

Guidance for Q4 FY16 and full year FY16

For Q4 FY16, Dollar Tree estimates consolidated net sales to range from $5.59 billion to $5.69 billion, based on low single-digit increases in same-store sales for the Dollar Tree and Family Dollar segments. Diluted EPS is estimated to be in the range of $1.24 to $1.33, an increase from the prior guidance of $1.21 to $1.30.

Consolidated net sales for full-year 2016 are now expected to range between $20.67 billion and $20.77 billion compared to the Company’s previously expected range of $20.69 billion to $20.87 billion. This estimate is based on a low single-digit increase in same-store sales, and 3.9% square footage growth. The Company now anticipates diluted EPS to range between $3.67 and $3.76. This compares to its previous EPS guidance range of $3.67 to $3.82, which did not include the $0.09 per diluted share of expenses related to our debt refinancing incurred in Q3 FY16.

Stock Performance

d4Dollar Tree’s stock ended the day at $87.76, gaining 1.37%, at the close on Friday, December 2nd, 2016, having vacillated between an intraday high of $88.51 and a low of $86.05 during the session. The stock’s trading volume was at 2,110,560 for the day. The Company’s market cap was at $20.41 billion as of Friday’s close.

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