Dollar Tree's (DLTR 0.04%) latest earnings report was a mixed bag. The company topped last quarter's sales and earnings estimates, but guidance for the current fiscal year isn't exactly thrilling. The discount retailer says continued inflation could bite into profits, and this might well be exactly what's in store.
On the other hand, Dollar Tree could also be understating just how much revenue and earnings growth is actually in the cards this year and next. A handful of things that are quietly working in shareholders' favor weren't boldly highlighted in the company's Q4 report or during the quarterly earnings call.
Here's a closer look at three of the more important tailwinds.
1. Dollar Tree is getting a handle on inventory
Dollar Tree, which also owns Family Dollar stores, turned $7.7 billion worth of sales into earnings of $2.04 per share for the three-month stretch ending in January. Overall sales improved 9% year over year, while same-store sales grew to the tune of 7.4%. Revenue and profits also topped estimates of $7.6 billion and $2.02 per share, respectively.
The retailer's full-year profit outlook, however, is a point of concern. Guidance for earnings somewhere between $6.30 and $6.80 per share is well short of the consensus estimate of $7.78. Although its 2023 sales outlook of between $7.2 billion and $7.4 billion is mostly better than analysts' guess of $7.2 billion, the company's management recognizes that freight costs remain high. It also fears investments in its own growth won't actually start meaningfully driving this growth until next year.
But this year might not be quite as rough as investors are being led to believe.
The first bullish clue the market might be overlooking is the progress Dollar Tree is making with its burgeoning inventory levels. While sales, as well as inventory, grew year over year, inventory's recent growth pace finally cooled -- rather dramatically.
Data source: Thomson Reuters. Chart by author. Revenue and inventory figures are in millions of dollars.
Also bear in mind that the company made a point of accepting springtime merchandise earlier this year than it normally would and is stocking up for a wave of store openings and expansions. Given this, the relatively modest year-over-year uptick in on-hand merchandise is actually a hint that the company is getting a handle on incoming shipments. At the same time, it's getting rid of more of what's already in stores.
Yes, analysts expect last year's rapid inventory growth to be slightly rekindled this year. This outlook doesn't appear to reflect the inventory-management improvements Dollar Tree is now putting in place, though, nor does it reflect the progress it's already made.
2. Dollar Tree is reducing its share count
The second encouraging clue buried in Dollar Tree's books? Its share count continues to fall. The number of DLTR shares issued and outstanding now stands at 224.1 million, down from 229 million a year earlier and 237.3 million a year before that. Yet $1.85 billion worth of funding is still approved for its current stock-buyback program.
Data source: Thomson Reuters. Chart by author.
For perspective, Dollar Tree's present market cap is just a tad above $32 billion.
3. Dollar Tree is reinventing its product assortment
Finally, while it's not readily apparent in Q4's balance sheet or income statement, just last quarter, Dollar Tree opened 123 new stores and renovated 112 Family Dollar units. It also added so-called Plus items, which carry higher price points of $3 and $5, to 119 Dollar Trees' inventories. These stores eventually see growth in their average ticket size.
This matters because another 1,800 Dollar Trees will add these higher-priced goods by the end of this year.
These sorts of efforts can take time to gain traction, however. The retailer's fourth-quarter press release plainly explains that Dollar Tree "expects gross and operating margins will decline in the first half of fiscal 2023," largely because of operating expenses linked to its current evolution.
Yet the same press release goes on to say the margin compression expected during the first half of this year will be "followed by expansion for the second half." CEO Rick Dreiling went on to comment during Wednesday's earnings call, "the company is confident that [these investments, once implemented] will yield attractive returns in 2024 and beyond."
There's the rub for most current and would-be investors. They want to see earnings growth now, or they want to wait on proven earnings growth before stepping into a stock. But stocks tend to reflect the foreseeable future rather than the recent past.
Translation: This stock could easily start to recover before the bottom line begins growing in earnest again.
Be greedy when others are fearful
Don't misread the message: It's certainly possible to open a new position too soon. On the flip side, it's also possible to look past the subtle hints of progress and wait too long to pull the trigger on a stock purchase.
The bigger risk with Dollar Tree right now is the latter. Shares are down for the past several months, and they didn't respond particularly well to the company's Q4 numbers or the near-term outlook.
Take a step back and look at the bigger picture, though. There's a light at the end of the tunnel, and it isn't an oncoming train. Use the current weakness as an opportunity to step into a stock that's likely to start to reflect next year's growth later this year.
