Dollar Tree Falls Despite A Strong Performance
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dollar Tree (NASDAQ: DLTR) lit up the Street last Thursday with its impressive first quarter results. It managed to beat the market’s expectations but the earnings projections for the year failed to please the investors. Let’s delve deeper into the company’s performance.
A look at the numbers
Revenue for the quarter jumped 11% from last year to $1.7 billion and the earnings surged almost 22% to $116 million or $1 per share. This has been the fourth consecutive quarter of increasing revenue and earnings for the company. The operator of discount variety stores managed to beat many of its competitors, especially Target Corporation (NYSE: TGT). Dollar Tree’s performance in the quarter was far ahead of its peer Target in terms of earnings and sales growth, which increased 5% and 6% respectively.
Yet, Dollar Tree's stock dropped 6% as a disappointing earnings forecast of 87 to 93 cents per share against Street's predictions of 95 cents dented investor confidence. Moreover, the company projects revenue between $1.66 and $1.7 billion whereas analysts expect it to be at least $1.7 billion. Even in the comparable store sales forecast, the company failed to meet the expectations as it projected it to be less than 5% which is below what it achieved in the previous quarter. However, I think it would be better if we look ahead than just one quarter and then decide on Dollar Tree.
Reasons for the smiles
The major driver for the growth in volumes was the increased buying of food and household cleaning supplies by the customers on the occasions of Easter and Valentine’s Day. Increased customer footfall led to a 5.6% increase in comparable store sales.
With the introduction of freezers and coolers in most of its stores the Chesapeake-based retailer could take advantage of adding perishable foods along with the groceries it used to offer. The feature of the retailer to sell everything for $1 or less attracted more and more customers for their basic necessities in the tough economic environment.
Growth with a pinch of salt
Dollar Tree is growing continuously. This is evident with their move of opening 110 new stores in the first quarter. It also relocated 44 stores. The total store count for the company now stands at 4,451.
But the only sad part of the news is that the company gave a lower than expected second quarter outlook which disappointed investors. It projected earnings per share for the period to be in the range of 87 cents and 93 cents.
The company looks very strong from inside since it has a lot of free cash flow which it mostly uses in its store expansion and share repurchase program. The company has also performed much better than most of its industry peers even in the tough economic times. I believe it shows strong signs of being a sound and a healthy company.
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