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With Firmer Results in Hand, Dollar Tree Speeds Up Family Dollar Renovations

By Asit Sharma - Updated Aug 29, 2019 at 4:43PM

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Evidence mounts that management's turnaround plan for the troubled business segment is succeeding.

Dollar Tree's (DLTR 1.29%) fiscal second-quarter earnings provided shareholders with a second consecutive quarter of hope that the fortunes of its flailing Family Dollar segment may finally be on the mend. As in the first quarter, the Family Dollar unit notched fairly healthy comparable sales -- actually matching growth in the Dollar Tree brand. As we dig into the quarter's details below, note that all comparative numbers refer to those of the prior-year quarter.

Dollar Tree: The raw numbers

Metric Q2 2019 Q2 2018 Change 
Revenue $5.74 billion $5.53 billion 3.8%
Net income $180.3 million $273.9 million (34.2%)
Diluted EPS $0.76 $1.15 (34%)

Data source: Dollar Tree. EPS = earnings per share. 

What happened with Dollar Tree this quarter?

  • Companywide same-store sales increased 2.4%, as both the Dollar Tree and Family Dollar segments booked 2.4% same-store sales gains. For Family Dollar, the comparable sales advance represented its third improvement in as many reporting periods: The business notched "comps" growth of 1.4% and 1.9% over the previous two sequential quarters.
  • Management noted that the Dollar Tree segment achieved its comparable sales growth despite the headwind of a global helium shortage.
  • The company completed 542 Family Dollar "H2" renovations, a format that incorporates expanded freezer and cooler doors, a wider selection of merchandise, and $1 price point Dollar Tree items in Family Dollar units. In a competitive dollar store environment, such increasing of consumer staples products should boost traffic and volume.
  • During the quarter, Dollar Tree also closed 296 underperforming Family Dollar stores as part of its turnaround plan for the segment, while closing nine Dollar Tree locations. In total, the company opened 150 new stores, completed 19 expansions or relocations, and rebranded 106 Family Dollar stores to the Dollar Tree label.
  • Gross margin slipped by 140 basis points to 28.7%. Rising freight shipment costs in both segments, and shrink (spoilage, wastage, and theft) in the Family Dollar segment compressed margin during the quarter.
  • Operating expense rose slightly as the company incurred costs for the consolidation of its store support centers, as well as costs for the closing of Family Dollar stores. These costs, combined with higher general and administrative expense and the lower gross margin, pushed operating margin down by 220 basis points to 4.7%.
  • Dollar Tree repurchased $88.4 million worth of its own shares during the quarter, bringing its buyback total to $139.2 million in the first half of the fiscal year.
A dollar sign is pictured on a concrete wall; its shadow is an arrow.

Image Source: Getty Images.

What management had to say

In Dollar Tree's earnings press release, CEO Gary Philbin announced an increased pace of H2 format renovations, essentially moving the full-year target from 1,000 to 1,150 stores. Philbin also enumerated the advantages of the company's recent store support center consolidation, from two locations (located in North Carolina and Virginia) to a single operation in Chesapeake, Virginia:

I am very pleased with the traction and momentum we are seeing in the Family Dollar business. The team's efforts to improve the consistency of execution across the store base and our acceleration of initiatives to optimize the real estate portfolio are paying off. We are increasing our planned Family Dollar H2 renovations for fiscal 2019 by 150 stores, most of which will occur in the third quarter. We are thrilled to now be operating from one consolidated store support center. One workspace should materially enhance alignment, communication, and efficiency, as well as our ability to support stores more effectively. Our focus continues to be to grow and improve our business to deliver increased value to long-term shareholders.

Looking forward

Peering ahead to the rest of the year, Dollar Tree expects sales of between $5.7 billion and $5.8 billion in the third quarter, and diluted EPS of $1.07 to $1.16. For the full fiscal 2019 period, management expects comparable sales to increase in the low single digits. The company tightened its 2019 revenue forecast to $23.57 billion-$23.79 billion, from a previous band of $23.51 billion to $23.83 billion. Finally, Dollar Tree lifted its full-year EPS target range from $4.77-$5.07 to $4.90-$5.11. This earnings estimate doesn't include the impact of the most recent round of tariffs on imported Chinese goods announced in August -- shareholders will have to wait for an update on the effect of these newest tariffs when Dollar Tree next reports in November.

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