Much as it did with the threat of tariffs until they were on top of it, Dollar Tree (NASDAQ:DLTR) is ignoring any potential risks it may face from the coronavirus outbreak. 

While its fourth-quarter earnings beat analyst expectations and revenue and comparable sales came up short, the deep discount chain said its outlook for the coming year did not include any potential impact from COVID-19 on its supply chain.

Because Dollar Tree imports the vast majority of its goods from China, where the outbreak began and has caused the greatest harm, the effects of the contagion on its future results could be substantial.

Spilled coins from change jar

Image source: Getty Images.

Shortchanged by Family Dollar

The problems Dollar Tree was having with its Family Dollar chain seem to be returning. Consolidated net sales for the retailer rose 1.8% to $6.32 billion, but comparable-store sales rose an anemic 0.4% -- well below Wall Street's forecast of 1.7%, but mostly on the strength of Dollar Tree's 1.5% same-store sales gain. Family Dollar saw comps fall 0.8% from the year-ago period.

Family Dollar had looked like it was on the road to recovery in 2019, even though the progress it was making began to stall as the year progressed. But it still looked like management's confidence in being able to turn the chain around was working.

Dollar Tree had been under pressure from activist investor Starboard Value, which had wanted the discounter to sell the chain because of perennial underperformance. Management convinced the private equity firm it would be able to change the retailer's direction through a combination of store closures and remodels, and comps had risen for four consecutive quarters. 

That string was broken in the fourth quarter, and Dollar Tree took a $313 million non-cash goodwill impairment charge on the chain, which was appreciably better than the $2.73 billion charge it took last year.

It maintains, however, that it continues to see strong growth out of the remodeled stores, and is accelerating the number of locations undergoing a renovation to 1,250 stores in 2020.

A sober outlook

Dollar Tree said adjusted earnings for the quarter came in at $1.79 per share, down from $1.90 a year ago, but at the high end of the range of $1.70 and $1.80 per share management had guided toward, and $0.04 per share ahead of Wall Street's consensus forecast.

Tariffs played a role in the lowered results, depressing gross margins, and they are having an effect on its outlook for 2020. Dollar Tree sees tariffs causing incremental costs of $47 million, which led it to forecast first-quarter earnings of $1.00 to $1.09 per share, well short of Wall Street's expectations the deep discounter would report $1.22 per share in earnings.

For the full year, Dollar Tree expects sales to be in a range from $24.21 billion to $24.66 billion, based on expected low single-digit increases in comps. Earnings are expected to range from $4.80 to $5.15 per share, below the midpoint of analyst forecasts of $24.72 billion in revenue and earnings of $5.21 per share.

Casting a wary eye

As Dollar Tree renovates more of its Family Dollar stores, investors will need to watch for whether it can change consumer opinion on the value of the store, and if it will have a material effect on the chain's performance.

If it slips back into its previous failing ways that have weighed heavily on its parent since it was acquired, it will be interesting to see whether Starboard Value keeps Dollar Tree on a short leash and tugs hard if the deep discounter doesn't quickly pick up again.