Discount retailer Dollar Tree, Inc. (NASDAQ:DLTR) reported fiscal second-quarter 2018 results on Thursday. Despite generally positive results, the company's Family Dollar segment proved a drag on revenue, and management tweaked full-year revenue and earnings estimates slightly to reflect slower anticipated growth.
The raw numbers
|Metric||Q2 2018||Q2 2017||Change (YOY)|
|Revenue||$5.53 billion||$5.28 billion||4.7%|
|Net income||$273.9 million||$233.8 million||17.2%|
|Diluted earnings per share||$1.15||$0.98||17.3%|
What happened with Dollar Tree this quarter?
Same-store sales rose 1.8% against the second quarter of 2017. The company operates under two brands, which also comprise its two operating segments: Dollar Tree and Family Dollar. Dollar Tree segment same-store sales improved by 3.7%, but this advance was offset by flat same-store sales in the Family Dollar segment.
- As for overall revenue by segment, Dollar Tree sales climbed 7% year over year to $2.77 billion, while Family Dollar sales edged up 2.3% to $2.76 billion.
Gross margin dipped by 70 basis points to 30.1% versus the prior-year quarter. The company cited higher domestic freight costs, as well as higher shrink (i.e., inventory loss due to spoilage, theft, and other factors) and rising distribution costs as primary factors. As with sales performance, the brunt of margin slippage occurred within Family Dollar, which saw a segment gross margin decline of 150 basis points to 25.7%. Dollar Tree segment margin fell by 10 basis points to 34.5%.
The company's operating margin also contracted, decreasing by one percentage point to 6.9%, although this was partially by design. Selling, general, and administrative expenses edged up roughly one percentage point to 23.2% of sales, as management utilized some of the company's tax savings (arising from last year's U.S. corporate tax law changes) to invest in higher compensation, increasing payroll expense.
The organization benefited from management's proactive management of debt. The company refinanced $4.0 billion of long-term borrowings in April, redeeming senior notes paying interest at 5.75% and replacing them with both floating notes at short-term rates and longer notes with interest rates ranging from 3.7% to 4.2%. Total debt on Dollar Tree, Inc.'s books has decreased by $636.2 million since the end of the fiscal second quarter of 2017, to a total of $5.0 billion.
As a result of debt restructuring and reduction, interest expense for the second quarter of fiscal 2018 fell to $46.1 million, versus $75.8 million in the prior-year quarter.
What management had to say
As you can see from the quarter's details above, Family Dollar is lagging its counterpart in top-line growth, and though its business model is set up to produce a lower margin than the Dollar Tree brand, shareholders can't be pleased with Family Dollar's declining profitability this year.
It's possible that the Dollar Tree segment, which sticks largely to a $1-per-item format, is presently enjoying more insulation from competition than Family Dollar, which offers price points between $1 and $10, thus opening it up to incursions from competitor Dollar General and a recently resurgent WalMart.
In Dollar Tree, Inc.'s earnings press release, CEO Gary Philbin outlined some broad measures the company is taking to stabilize the Family Dollar label, which it has now owned for three years following a July 2015 acquisition:
Our Dollar Tree banner continues to perform at a high level and the impact of our initiatives continue to drive top line revenue. Our efforts at Family Dollar continue to focus around delivering a better shopping experience, and we are pleased with the results of our renovation program to date. Our customers are responding to the assortment and layout and we expect to exceed our store renovations target for this fiscal year. Together, the banners are focused to deliver increased value to long-term shareholders by continuing to grow and improve our business
Dollar Tree, Inc.'s management marginally scaled back revenue and earnings estimates for the full year alongside earnings on Thursday. Fiscal 2018 revenue is now expected to land between $22.75 billion and $22.97 billion, against a previous range of $22.73 billion to $23.05 billion.
Full-year diluted earnings per share (EPS) are now projected to hit a band of between $4.85 and $5.05, versus a prior outlook of $4.80 to $5.10. Of this $0.05 reduction per share, $0.04 stems from a charge the company will take against earnings this year due to a new antidumping duty imposed by the U.S. Department of Commerce on ribbon the organization purchases from China. Adjusting for this charge, 2018 EPS estimates have been crimped by just a penny.