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

Growing Customer Base: Dollar Tree, Inc. (NASDAQ: DLTR) got more than 900,000 new customers signed up for Smart Coupons during the first quarter of 2018 making their overall enrollment to over six million since 2016. The Family Dollar mobile app has 2.9 million customers while the group continues to make penetration on the new private brands across the chain. E-mail subscribers account for more than 3.4 million customers while the group sees these subscribers to be brand loyal. The group targets to have better performance during Spring, Easter, and early summer in terms of benefitting from in-store traffic and online sales.

Focusing on store experience: The group further renovated 215 Family Dollar stores during the first quarter of 2018 leading to a total count of 592. Newly renovated stores have been slated to provide better customer  experience in the long run. The group expanded beverage and snacks segment, including immediate consumption near checkout, added assortment of food in coolers and freezers, updated hair care assortment, expanded adult beverage in select stores, and provided a shopper-friendly power alley to emphasize $1 Wow items. They finished rollout of new brands in the consumables category while making changes in apparel and home categories, which would be finished by the end of the second quarter. As per the real estate segment, the group opened a total of 130 new stores, 68 Dollar Trees, 62 Family Dollars, while expanded 26 stores, 24 Dollar Trees and two Family Dollars. As stated above, the newly renovated Family Dollar stores come under the initiative for a total of 371 projects slated during the quarter and are of significance. DLTR thus closed the first quarter with 14,957 stores including 6,716 being Dollar Trees, and 8,241 being Family Dollars.


First quarter of 2018 Stores’ performance (Source: Company reports)

Decent same store sales: For the first quarter of 2018, the group’s overall sales rose 5% to $5.55 billion while Dollar Tree segment total sales surged 8.3% to $2.78 billion. Family Dollar segment total sales rose only 2% to $2.77 billion while Enterprise same-store sales were lifted up  by 1.4%. But the same-store sales growth was decent for the Dollar Tree banner rising 4% or 4.1% when adjusted for Canadian currency fluctuations, and the Family Dollar banner increased 1.1%. Operating income for the enterprise rose to $437.6 million, against $388.8 million in pcp.


 
Overall financial performance for the first quarter (Source: Company reports)

Rising costs impacted margins: The group’s gross profit rose 4.5% to $1.7 billion during the first quarter of 2018, against pcp. On the other hand, gross profit margin fell 20 basis points to 30.6% versus 30.8% in the prior year's quarter. There was a slip of 40 basis points to 34.5% in gross profit margin for the Dollar Tree during the first quarter against pcp. Shrink costs rose 30 basis points, while merchandise cost, including freight surged 20 basis points hurting the margins. Distribution costs rose 15 basis points, on the back of higher distribution center payroll costs. Fall in occupancy costs by 20 basis points offset the pressure to a certain extent. Family Dollar segment Gross profit margin fell 20 basis point to 26.7% during the first quarter, from 26.9% in pcp.

Balance sheet position: As of the first quarter of 2018 end, the cash and cash equivalents reached $475.2 million, from $1.1 billion at the end of fiscal 2017. Outstanding debt as of May 5, 2018, fell by $123 million to over $5 billion. The group also made a new credit agreement during the quarter which comprises $1.25 billion revolving and a $782 million term loan facility. On April 19, they finished registered offering of $4 billion in several tranches of investment grade notes. The group also paid $114.3 million of prepayment fees, expensed 41.6 million in unamortized non-cash deferred financing cost, and incurred a net $4.6 million of interest on the new notes prior to the repayment of the acquisition notes. The group forecasts to save over $48 million in annual interest expense going forward. As per the inventory for the Dollar Tree segment, it rose 7.9% against pcp, while selling square footage increased 4.3%. Inventory for selling square foot rose 3.4% and the group sees the present inventory levels are appropriate to support the scheduled new store openings and their sales initiatives for the second quarter. Inventory for the Family Dollar segment rose 16.9% against pcp while it rose 14% on a selling square foot basis.

Guidance: The group sees their total sales to be in the range of $22.73 billion and $23.05 billion for 2018 by assuming a low single-digit same-store sales increase and 3.7% square footage growth. Accordingly, their net income for diluted share for full fiscal 2018 is expected to be in the range of $4.80 and $5.10, against their earlier forecasted range of $5.25 to $5.60. This forecasts include a $0.13 per share of benefit related to expected interest expense savings from the refinancing, $0.04 per share of benefit for an expected reduction in the second quarter corporate tax rate, $0.52 per share of one-time cost associated with the company's first quarter debt refinancing, and $0.09 per share of forecasted cost given the ongoing pressure related to freight and shrink expense. For the second quarter of 2018, the group expects consolidated net sales to  be in the range of $5.47 billion to $5.57 billion, assuming a low single-digit rise in same-store sales for the combined enterprise. Diluted earnings per share are expected to be in the range of $1.07 to $1.16 for the second quarter.

Potential opportunity and Strategy: The group believes that it is well-positioned in the most attractive sector of retail and accordingly sees to continue to deliver growth leading to a better shareholder value for long-term shareholders. The group believes that the combination of nearly 15,000 Dollar Trees and Family Dollar stores offers it with a great opportunity to serve more customers in all types of markets. The combination of these two great brands offers a better flexibility in managing their future. Given the timing shift of the holiday and a colder-than-normal-spring weather behind the group, the group expects a pick-up in sales trends at both Dollar Tree and Family Dollar in May. Despite pressure on freight cost, the group is making efforts to offset this impact. The group’s Family Dollar consumables delivered a decent business performance during the first quarter as their efforts of rebuilding the brand in relevance to their customer shopping experience, paid off. Family Dollar made a positive start for the second quarter. Last year, the group developed and tested an initiative for select Dollar Tree stores, called Snack Zone near the checkout areas. This layout had over 260 Dollar Tree stores as of May 5, 2018, with over 750 Snack Zone stores. The group also sees potential in this area which could boost their sales and earnings.


Stores opportunity as of 2017 (Source: 2017 Company Annual Report)

Stock performance: The shares of Dollar Tree fell over 20% during this year to date but rose about 27% in one year. This month, the shares saw a recovery of about 4%. The concerns over the group’s margins seem to be easing off given the group’s improving same store sales and Family Dollar segment performance. The group’s strategic efforts, efforts to boost customer experience and better synergies from Family Dollar business could drive the stock going forward. We believe investors need to leverage the correction on the stock as a buying opportunity. Based on the foregoing, we rate a ‘buy” on the stock at the current price of $ 85.20.
 

DLTR Daily Chart (Source: Thomson Reuters)

 
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