Virginia-based chain of discount variety stores Dollar Tree (DLTR, Financial) missed analyst estimates on both top line and bottom line as it reported its fiscal 2015 first quarter earnings recently, sending the stock down in the pre-market trading. However, the numbers improved year on year. The retailer reported earnings per share of $0.71 on revenue of $2.18 billion, up 6% from prior year period’s $0.67, but lower than analyst estimates of $0.75 a share. Revenue for the quarter improved 8.8% but missed the street’s forecast of $2.2 billion. Here’s a look at Dollar Tree’s latest quarter.
Quarter’s numbers
Looking at just the top line and bottom line, it’s clear Dollar Tree’s performance improved during the quarter, though it failed to live up to the market’s expectations. Nevertheless, the retailer reported some strong digits – the 8.8% improvement in top line is definitely not something negligible, improvement of operating income by 4.9% to $11.3 million deserves mention, and 5.8% improvement in net income surely is a noteworthy point. The operating margin for the quarter dropped to 11.2% from prior year period’s 11.6%. But this was primarily due to the increase in freight cost as a percentage of sales on the back of a surge in domestic trucking rates. However, this was partially offset by lower fuel cost.
During the three-month period, Dollar Tree spent $66.9 million in capital expenditures, significantly down from the previous year’s $71.9 million. For the full year the retailer expects capital expenditures to range between $465 million and $475 million. The company is putting in money towards establishing new stores, remodeling new stores and key development stores, and expanding frozen and refrigerated capability to more than 300 stores, among a few others.
Stores and comp sales
During the quarter Dollar Tree opened 93 new stores and relocated and expanded 10 existing stores for a total of 103 projects, resulting in an increase of total square footage by more than 7%. At the end of the quarter Dollar Tree had a total of 5,454 stores and the retailer plans to open another 400 stores in fiscal 2015,and relocate and expand 75 stores for a total of 475 projects across the U.S. and Canada. By the end of the year, square footage should increase by 7.2% compared to the last fiscal.
Coming to comp sales, the retailer is pleased with its performance as it delivered another quarter of strong sale-store sales. In fact, this was the 29th consecutive quarter of positive comp sales for Dollar Tree. On a constant currency basis comps improved 3.4%, driven primarily by both the increase in store traffic (2.1%) and average ticket (1.3%). However, when adjusted for Canadian currency fluctuations, comp sales improved 3.1%. During the earnings call, Dollar Tree mentioned the increase in traffic and the average ticket was expected as March was the strongest comp month on the back of Easter calendar shift. The retailer’s sales performance across its several verticals improved during the quarter, and it witnessed increased sales in both basic consumables and discretionary products.
Headwinds
Dollar Tree believes this first quarter was a “unique quarter.” According to CEO Bob Sasser, “a calendar shift with Easter falling two weeks earlier this year, we estimate the impact of the holiday calendar shift was a negative $8 million to sales and additionally, the recent West Coast port slowdown increased in severity; it lasted longer than expected and it negatively impacted our earnings as higher margin import merchandise was delayed in getting to the stores. … This resulted in lost high-margin sales in the first quarter, incremental transportation and delivery costs per shipment that had to be diverted to alternate facilities and increased labor costs as stores managed uncertain product flow delivery schedules.”
However, Sasser is proud of Dollar Tree’s logistics, merchandise and store teams who worked very hard to pull off a great quarter despite several challenges.
The strategy in play
Dollar Tree is investing in its customers by offering high-value products. For the current fiscal the retailer plans to focus on driving traffic to its website as well as creating brand awareness and brand advocacy. The company believes this will add greatly to increase e-commerce sales and well as in-store sales. During the first quarter Dollar Tree saw more than 12 million customers visiting its ecommerce platform through a variety of gadgets such as personal computers, mobile devices and tablets. In order to drive traffic the company is reaching out to existing and potential customers through e-mails, social media, search engine based marketing among a few others.
But the focus is not just on customers; it’s also on developing its own competencies. That’s why the retailer has been investing in expanding its stores. In addition to that Dollar Tree also plans to improve the productivity of its existing stores by offering a better assortment of products which is helping customers realizing better value. With these strategies working in favor of the retailer, Dollar Tree expects the numbers of the second quarter to be significantly better than fiscal 2014’s comparable period. All in all, the first quarter of fiscal 2015 market a good beginning for Dollar Tree. Industry experts and analysts believe the stock as much room to grow. Let’s keep a close watch on this dollar store and see how the current quarter turns out.
