Why Is Dollar Tree Up 4% Since Last Earnings Report?

A month has gone by since the last earnings report for Dollar Tree DLTR. Shares have added about 4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Dollar Tree due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Dollar Tree's Q4 Earnings Miss, Family Dollar Comps Soft

Dollar Tree has reported fourth-quarter fiscal 2023 results, wherein earnings and sales missed the Zacks Consensus Estimate. The top line declined year over year, while earnings improved. The company's results have benefited from gains across both segments, higher traffic and robust market share growth. However, product cost inflation, an unfavorable sales mix and elevated shrink continued to hurt.
Dollar Tree's earnings increased 25% year over year to $2.55 per share. However, earnings missed the Zacks Consensus Estimate of $2.67. Earnings included costs primarily related to general liability claims of 17 cents per share.
Consolidated net sales declined 11.9% year over year to $8,639.9 million and missed the Zacks Consensus Estimate of $8,673 million. Enterprise same-store sales (comps) improved 3% year over year. The company's comps benefited from a 4.6% rise in traffic, partly negated by a 1.5% decline in average ticket.

Quarter in Detail

For the Dollar Tree banner, comps improved 6.3%, while the same for the Family Dollar banner declined 1.2%. The Dollar Tree segment benefited from a 7.1% increase in traffic, which was somewhat offset by a 0.7% decline in average ticket. Comps at Family Dollar were aided by a 0.7% increase in traffic, offset by a 2% decline in average ticket.
We anticipated enterprise comps to increase 2.7% in the fiscal fourth quarter. Our model predicted comps growth of 5.7% for the Dollar Tree banner and a 1% comps decline for Family Dollar.
The adjusted gross profit rose 19.8% year over year to $2.86 billion, whereas the gross margin expanded 220 basis points (bps) to 33.1%. We estimated a rise of 32.7% in adjusted gross profit for the fiscal fourth quarter and a 170-bps expansion in the adjusted gross margin. Lower freight costs, sales leverage, gains from the 53rd week in fiscal 2023, and higher allowances aided the gross margin. This was partly negated by product cost inflation, an unfavorable sales mix and elevated shrink. The gross margin expanded 230 bps to 39% at the Dollar Tree banner and 160 bps to 25.2% at the Family Dollar segment.
Adjusted selling, general and administrative (SG&A) expenses, as a percentage of sales, increased 150 bps to 24.4%. The increase was mainly driven by labor investments in stores and field payroll, investments in repairs and maintenance, and higher depreciation and amortization. This was partially offset by sales leverage, the impacts of the 53rd week and lower utility expenses.
As a percentage of sales, we expected SG&A expenses to increase 70 basis points year over year to 23.6% in the fiscal fourth quarter. In dollar terms, SG&A expenses were anticipated to increase 15.2% year over year.
Adjusted operating income rose 21.2% year over year to $749.1 million. The operating margin expanded 70 bps to 8.7%. We estimated 26.5% growth in adjusted operating income and a 100-bps expansion in the adjusted operating margin. Segment-wise, the adjusted operating margin expanded 80 bps to 17.6% for Dollar Tree. The Family Dollar segment reported an adjusted operating margin of 0.2%, up 20 bps from the year-ago quarter.

Balance Sheet

Dollar Tree ended fiscal 2023 with cash and cash equivalents of $684.9 million. As of Feb 3, 2024, net merchandise inventories decreased 6.2% year over year to $5.1 billion. It had a net long-term debt of $3.4 billion and shareholders' equity of $7.3 billion as of Feb 3, 2024.
The company did not repurchase any shares in the fiscal fourth quarter due to its portfolio review process. In fiscal 2023, it bought back 3.9 million shares for $504.3 million. As of Feb 3, 2024, Dollar Tree had $1.35 billion remaining under its existing authorization.

Guidance

For fiscal 2024, Dollar Tree expects consolidated net sales of $31-$32 billion. The company anticipates mid-single-digit comps growth. Comps are likely to increase in the low to mid-single digits for the enterprise, comprised of mid-single-digit growth in the Dollar Tree banner and low-single-digit growth in the Family Dollar segment.
Management expects earnings per share of $6.70-$7.30. The outlook includes a 15-cent benefit from the anticipated store closures in the Family Dollar segment, which is mainly expected to occur in the second half of fiscal 2024. The company expects to continue closing underperforming stores in the first half of fiscal 2024.
For first-quarter fiscal 2024, DLTR expects consolidated net sales of $7.6-$7.9 billion, based on low to mid-single-digit comps growth for the enterprise. Comps are also expected to improve in the low to mid-single digits at the Dollar Tree banner. Meanwhile, comps for the Family Dollar banner are likely to be flat year over year. EPS is estimated to be $1.33-$1.48 for the fiscal first quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

The consensus estimate has shifted -15.67% due to these changes.

VGM Scores

At this time, Dollar Tree has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Dollar Tree has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Dollar Tree is part of the Zacks Retail - Discount Stores industry. Over the past month, Target TGT, a stock from the same industry, has gained 4.3%. The company reported its results for the quarter ended January 2024 more than a month ago.

Target reported revenues of $31.92 billion in the last reported quarter, representing a year-over-year change of +1.7%. EPS of $2.98 for the same period compares with $1.89 a year ago.

Target is expected to post earnings of $2.02 per share for the current quarter, representing a year-over-year change of -1.5%. Over the last 30 days, the Zacks Consensus Estimate has changed +0.2%.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #2 (Buy) for Target. Also, the stock has a VGM Score of A.

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