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Why Dollar Tree Stock Popped Today

By Jeremy Bowman – Nov 29, 2018 at 4:27PM

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Shares of the dollar-store chain were moving higher in spite of an underwhelming earnings report.

What happened

Shares of Dollar Tree (DLTR -0.05%) were moving higher today after the discount chain posted solid third-quarter sales growth, beat earnings estimates, and said it would renovate at least 1,000 Family Dollar stores. As a result, the stock was up 6.5% as of 3:18 p.m. EST.

So what 

Overall same-store sales rose just 1% across the company, increasing 2.3% at Dollar Tree-branded stores but falling 0.4% at Family Dollar, as the company has struggled to turn around that banner after acquiring it in 2015. Nonetheless, revenue rose 4.2%, to $5.54 billion, as the Dollar Tree opened hundreds of new stores over the last year, continuing its aggressive expansion. That figure was just shy of estimates at $5.55 billion.

A shopping cart inside a store

Image source: Getty Images.

Gross margin fell 110 basis points to 30.2% due to rising freight, occupancy, and distribution costs, as well as markdowns. That led to operating income falling 9%, to $387.8 million. However, earnings per share jumped from $1.01 to $1.18, which beat expectations of $1.14. This beat was due to a lower tax rate thanks to the the tax reform law. 

As part of an initiative to boost sales at Family Dollar, management said it would accelerate its store-optimization program and renovate a minimum of 1,000 Family Dollar stores next year, which investors seemed to applaud. CEO Gary Philbin said, "Through the hard work we have done over the past three and a half years, we have put in place the foundational elements that we need to be successful over the long term." 

Now what 

Dollar Tree also lowered its full-year guidance, making the stock's rise all the more surprising. Management is now calling for revenue of $22.72 billion-$22.83 billion, down from $22.75 billion-$22.97 billion, and same-store sales growth in the low single digits. The company also cut full-year earnings-per-share guidance from $4.85-$5.05 to $4.86-$4.95.

This was not a great report for the retailer by any means, but investors seem optimistic about Family Dollar, especially since the stock has lost 18% this year -- even after today's gains. That news was enough to make up for some of this year's losses.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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