Company Overview: Dollar Tree, Inc. is an operator of discount variety stores. As of January 28, 2017, the Company operated 14,334 stores in 48 states and the District of Columbia, and five Canadian provinces. Its segments include Dollar Tree and Family Dollar. The Dollar Tree segment is the operator of discount variety stores offering merchandise at a fixed price. The Family Dollar segment operates a chain of general merchandise retail discount stores providing consumers with a selection of merchandise in neighborhood stores. Its stores operate under the names of Dollar Tree, Family Dollar and Dollar Tree Canada. As of January 28, 2017, the Dollar Tree segment included 6,360 stores operating under the Dollar Tree and Dollar Tree Canada brands, 11 distribution centers in the United States and two in Canada and a Store Support Center in Chesapeake, Virginia, and 11 distribution centers and a Store Support Center in Matthews, North Carolina under the Family Dollar brand.


DLTR Details

Decent third Quarter of 2017 Financial Performance: Operator of discount variety stores, Dollar Tree, Inc. (NASDAQ: DLTR) has reported 6.3% growth in the consolidated net sales to $5.32 billion in the third quarter of FY 17 from $5.00 billion in the prior year's third quarter. The Enterprise same-store sales posted 3.2% growth on a constant currency basis. After adjusting to include the impact of Canadian currency fluctuations, the enterprise same-store sales increased by 3.3%. The same-store sales growth was driven due to the increases in average ticket and comparable transaction count. The same-store sales for the Dollar Tree banner has increased 5.0% on a constant currency basis (or 5.2% when adjusted to include the impact of Canadian currency fluctuations) and the same-store sales for the Family Dollar banner increased 1.5% in the third quarter of 2017. Moreover, DLTR in the third quarter of FY 17 has increased the gross profit by 9.6% to $1.67 billion compared to $1.52 billion in the prior year's third quarter. As a percentage of sales, the gross margin has enhanced to 31.3% compared to 30.4% in the prior year. The 90-basis point improvement in the margin was the result of lower merchandise costs, markdowns and occupancy costs as a percentage of sales. Further, the selling, general and administrative expenses in the third quarter of FY 17 were 23.3% of sales compared to 23.6% of sales in the prior year's third quarter. The 30-basis point improvement, as a percentage of sales, was driven primarily due to the lower depreciation costs, lower healthcare costs and lower store operating costs resulting primarily from lower utility costs as a percentage of sales, partially offset by higher hourly payroll costs and incentive compensation as well as higher operating and corporate expenses resulting from higher advertising and store supplies costs and increased legal fees. Additionally, in the third quarter of FY 17, the operating income has risen 24.2% to $425.2 million as compared with $342.4 million in the same period last year and operating income margin increased to 8.0% of sales in the current quarter from 6.8% in last year's quarter. Overall, in the third quarter of FY 17, the net income rose $68.3 million to $239.9 million and diluted earnings per share grew 40.3% to $1.01 as compared to $0.72 in the prior year's quarter. Meanwhile, during the third quarter of 2017, the company had opened 169 stores, expanded or relocated 23 stores, and closed six stores. Retail selling square footage at the third quarter end was approximately 115.8 million square feet.
 

Third quarter of 2017 performance (Source: Company reports)
 
Appointment of new personnel at Board of Directors: DLTR has appointed Stephanie Stahl as a new independent director to the company's board of directors. Stephanie currently serves on the Boards of Directors of Knoll, Inc. and Chopt Creative Salad Company. Further, Stephanie’s experience in global marketing, brand building and strategic development will help to grow the Dollar Tree and Family Dollar businesses.

President Trump's Budget proposal impact on the stock: DLTR stock got affected when the Trump administration made a proposal to reduce food-stamp benefits. This is because the reduction of food stamp would slash cash payments and substitute them with packages of food, which is potentially one of the biggest shake-ups in the history of the Supplemental Nutrition Assistance Program, or SNAP. As per Gordon Haskett Research Advisors analyst Chuck Grom, Dollar General and Dollar Tree’s Family Dollar division have signaled that food stamps account for roughly 5 percent of sales. However, the competitors including Walmart Inc. and Kroger Co. would also be affected. The food-stamp program served 42.2 million people during the FY 2017, with many spending the benefits at supermarkets. Moreover, as per the administration, the plan to overhaul SNAP would save a projected $214 billion over a decade. Further, this would give all households receiving more than $90 a month in cash a food-aid package that would include items such as shelf-stable milk, peanut butter, cereal and meat. Additionally, the reduction in food-stamp benefits could reduce the revenue by 2% to 3%. On the other hand, the group could mitigate at least a part of the impact on the bottom line through cost savings elsewhere. Despite mitigation, the earnings would be lower without SNAP than they would be if SNAP remains intact. However, it is yet to be seen whether the new proposal gets a heads-up while a modest impact is expected is seen with changes to SNAP.

Renovation initiatives: The group finished another 191 Family Dollar store innovations during the third quarter of 2017 as a part of their renovation initiative. Their target for fiscal 2017 is 350 stores while the group intends to continue to renovate hundreds of older Family Dollar stores as they improve the business. Some of their improved store layout comprises a better adjacencies and more productive end caps, expanded beverage and snack, including immediate consumption coolers near checkout, headed assortment of food and coolers and freezers, updated air care assortments, expanded adult beverage in some stores, shopper-friendly power alley to promote Dollar well items, and a faster checkout process for customers. On the other side, the group opened two new stores in Canada bringing the total Canadian stores to 226. For Dollar Tree direct, the digital division of Dollar Tree is offering an opportunity to broaden their customer base, drive incremental sales, expand brand awareness and attract more customers into their stores. During the third quarter, the group opened a total of 169 new stores, 99 Dollar Tree and 70 Family Dollars. They relocated or expanded 23 stores, 19 Dollar Trees and four Family Dollars.
 

Store Count (Source: Company Reports)
 
Future Outlook: For the fourth quarter of 2017, the group forecasts the consolidated net sales to be in the range from $6.32 billion to $6.43 billion, based on a low single-digit increase in same-store sales for the combined enterprise. The diluted earnings per share are expected to be in the range of $1.80 to $1.89. Moreover, the consolidated net sales for full-year FY17 are now expected to be in the range from $22.20 billion to $22.31 billion compared to the company's previously projected range of $22.07 billion to $22.28 billion. This projection is based on a low single-digit growth in the same-store sales and 3.7% square footage growth. The company now expects the net income per diluted share for full-year fiscal 2017 to be in the range between $4.64 and $4.73, compared to its previous guidance of $4.44 to $4.60. This forecast includes $53.5 million, or $0.14 per diluted share, of receivable impairment charges incurred in 2017. The FY 17 has an extra week; and this extra week, in the fourth quarter, is expected to add $400 million to $430 million to sales and $0.19 to $0.22 to diluted earnings per share, both of which are included in the forecast. Overall, the company is confident in the ability to continue driving positive same-store sales, through meeting the customers' needs, improving the enterprise operating margin and delivering year-over-year earnings per share growth.

Stock Recommendation: The shares of DLTR have risen 32.5% in one year at the back of strong performances over the year. The combination of the company’s differentiated fixed price-point concept at Dollar Tree along with the performance improvement opportunity at Family Dollar contributes to its unique retail growth and improvement story. We believe there is a further bullish momentum in the stock and accordingly rate a “Buy” on the stock at the current price of $105.69, ahead of their fourth quarter of 2017 results which would be released on March 07, 2018.
 

DLTR Daily Chart (Source: Thomson Reuters)

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