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Why Shares of Dollar Tree Surged Today

By Timothy Green – Updated Nov 22, 2016 at 12:18PM

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The retailer reported mixed results, but a big profit increase drove shares higher.

Image source: Dollar Tree.

What happened

Shares of retailer Dollar Tree (DLTR 0.23%) rose on Tuesday following the company's third-quarter results. The numbers were mixed relative to analyst estimates, but a surge in profits gave investors a reason to drive up the stock price. At 11:30 a.m. EST, the stock was up about 10%.

So what

Dollar Tree reported third-quarter revenue of $5 billion, up 1.1% year over year but $80 million below the average analyst estimate. Same-store sales rose 1.7% on a constant currency basis, extending the company's streak of positive same-store sales growth to 35 consecutive quarters.

Non-GAAP earnings per share (EPS), which excludes costs related to debt refinancing, came in at $0.81, up from $0.35 in the prior-year period and $0.03 better than analysts were expecting. Gross margin improved by 2.1 percentage points year over year to 30.4%, driving an 8.6% increase in gross profit and a 53% increase in operating profit. Operating expenses were essentially flat compared to the prior-year period.

"I am proud of our team's achievements in our third quarter. Our results demonstrated a solid performance in our Dollar Tree segment, continued meaningful progress in our integration of Family Dollar, and our ability to refinance and pre-pay a portion of our outstanding debt in order to reduce future interest costs," said Dollar Tree CEO Bob Sasser.

Now what

Dollar Tree's guidance was a mixed bag. For the fourth quarter, the company expects revenue between $5.59 billion and $5.69 billion, with EPS in the range of $1.24 to $1.33. That EPS guidance is up from previous guidance of $1.21 to $1.30.

For the full year, Dollar Tree lowered its sales guidance slightly. Revenue is expected between $20.67 billion and $20.77 billion, down from a previous range of $20.69 billion to $20.87 billion. EPS is now expected between $3.67 and $3.76. This is down from previous guidance of $3.67 to $3.82, but those numbers didn't include the $0.09- per-share impact from debt refinancing.

"I am encouraged by our continued progress in building the foundation for a larger, stronger and more profitable Family Dollar business," continued Sasser. "The stores are cleaner, the values are greater and our customer feedback scores regarding merchandise assortments and in-stocks have improved. As a combined organization, we are uniquely positioned to efficiently grow our businesses to better serve more customers in more markets. We are well-positioned and prepared for the upcoming fourth quarter and holiday selling season."

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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