Apologies in advance for taking liberties with The Graduate's script here, but:
Mr. McGuire: I just want to say one word to you -- just one word.
Ben: Yes sir.
Mr. McGuire: Are you listening?
Ben: Yes I am.
Mr. McGuire: Coolers.
If you caught fellow Fool Rich Duprey's Foolish Forecast on discount chain Dollar Tree (NASDAQ:DLTR) last week, before the company's Q3 earnings news came out, you knew that coolers were going to be key to the quarter. You knew that the emphasis on selling, as CEO Bob Sasser calls them, "basic consumable products" was the driving force behind Dollar Tree's 14% sales growth, 4% growth in same-store sales, and steadily shrinking margins.
But it's not just the low price of foodstuffs, and the high cost of the equipment needed to keep them chilled, that's to blame for Dollar Tree's contracting margins. Sasser also observed that part of the reason his stores' gross margin declined in Q3 was "increased shrink accrual" (in lay terms, shoplifting). The firm's recent acquisition, Deal$, also seems to have brought with it lower-margin sales that depressed firmwide margins. None of this, however, prevented the firm from hitting the profits number that Wall Street was looking for, or from projecting Q4 profits that neatly bracketed Wall Street's anticipated $0.91 per share.
Along with the earnings results, Dollar Tree announced that it has tacked on an additional $500 million to its previous, almost-used-up $300 million share buyback program. At today's prices, the $527 million in combined repurchases authorized would take 16.8 million shares off the market, reducing Dollar Tree's share count by as much as 16.5%.
Of course, Dollar Tree doesn't have $527 million just right now. Actually, the firm only has $119 million in cash (against $250 million in long-term debt) and has negative free cash flow year to date (in contrast to last year's $10 million in positive free cash flow). But remember, as a retailer, Dollar Tree generates virtually all of its free cash flow in the Christmas quarter. In last year's fourth quarter, the firm generated $216 million in positive free cash flow. This suggests that Dollar Tree could conceivably implement its buyback in full within a couple of years without taking on any new debt.
Missed our previews on Dollar Tree? Catch up on them in:
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Fool contributor Rich Smith does not own shares of any company named above.
