Dollar Tree (DLTR) put up some pretty nice results on Tuesday morning. The guidance wasn't all that gnarly either, except that is... for a lackluster outlook of profits. The stock was pummeled. Down 12.87% on Tuesday and another 1.46% on Wednesday. Your old pal has initiated a long position on that weakness. This is that tale.
For the three month period ended October 29th, Dollar Tree posted GAAP EPS of $1.20 on revenue of $6.94B. These top and bottom line results both beat Wall Street, while the sales number was good enough for year over year growth of 8.1%. This was an acceleration from 7% growth for the two quarters prior and 5% growth the quarter before that.
Same store sales increased 6.5% across the firm from the year ago comp. Broken out by brand, Dollar Tree locations experienced same store sales growth of 8.6% (8.5% in constant currency), while Family Dollar Stores showed comp growth of 4.1%.
Gross profit increased 17.5% on a gross margin that improved 240 basis points to 29.9%. Operating income increased 22.8% to $381.3M on an operating margin that improved 70 basis points to 5.5%. This put net income at $266.9M, which was up 23.1%. Undeniably, a nice quarter.
Segment Performance
- Dollar Tree drove revenue of $3.756B (+9.9%), producing gross profit of $1.328B (+28.8%) on a gross margin of 35.4% (up from 30.2%). This created operating income of $499.7M (+71.8%) on an operating margin of 13.3% (up from 8.5%).
- Family Dollar Stores drove revenue of $3.181B (+6.1%), producing gross profit of $743.2M (+1.5%) on a gross margin of 23.4% (down from 24.4%). This created operating income of $-18.4M (down from $+88.6M) on an operating margin of -0.6% (down from 3.0%).
Guidance
- For the current quarter, the firm expects net sales to range from $7.54B to $7.68B. This put the low end of the range above what was Wall Street consensus of $7.53, based on a mid to high single digit increase in overall same-store sales.
- For the full year, the firm now sees net sales landing in a range spanning from $28.14B to $28.28B, which is up from previous guidance of $27.85B to $28.1B, as well as again taking the lower end of the range above what Wall Street was looking for ($28.05). However, the firm also guided full year EPS to $7.10 - $7.40. Wall Street had been anticipating something close to $7.30. This would place the mid-point of the range a dime lower than that.
Balance Sheet
The firm ended the quarter with a net cash position of $439M (-37.4% from a year ago) and inventories of $5.658B (+31.1% from a year ago). This puts current assets at $6.447B. With current liabilities adding up to $4.683B, the firm's current ratio stands at a healthy 1.38. However, sans inventories, the quick ratio was at a paltry looking 0.17.
Total assets amount to $22.91B, including $5.082B in "goodwill" and other intangibles. That's 22% of total assets, which is a bit high, but normal for this name. I don't see it as a problem. Total liabilities less equity comes to $14.634B. This includes $3.42B in long-term debt and $5.156B in long-term leases.
The fact is that "currently" the balance sheet is in good shape. Being old-school, I would be more comfortable with either a larger cash position, reduced debt load, or some combination of the two. Of course, a lot of that will come down to how well the firm manages those inventories.
Wall Street
Since these earnings were released on Tuesday morning, I have found nine sell-side analysts rated at four stars or better at TipRanks that have opined on DLTR. Across those nine, there are six "buy" or buy-equivalent ratings, two "hold" or hold-equivalent ratings and one "underperform" rating, which is considered to be sell-equivalent. The average target price of these nine analysts is $165.33 with a high of $194 (Krisztina Katai of Deutsche Bank) and a low of $109 (Robert Ohmes of Bank of America)
Once omitting the high and low as outliers, the average target price across the other seven rises to $169.28. One highly followed analyst that did not make my cut by virtue of his three-star rating, but may be worth mentioning as some readers probably follow him due to his media presence is Matthew Boss of JP Morgan. Boss maintained his "overweight" (buy-equivalent) rating, while reducing his target price from $176 to $170.
My Thoughts
The market has taken its pound of flesh. The quarter was good. Very good at Dollar Tree. Less so at Family Dollar. The guidance is nice as well, except that margin is going to suffer as there is a bloated level of inventories to manage. That said, I feel that as the economy slows throughout the first quarter moving into the second quarter of 2023, and that this is precisely that kind of retailer that will do well, as consumers on a budget seek ways to stretch paychecks.
I initiated this name with a long position earlier this week as I felt the selloff was probably overdone. So far, my average price is $149.45. I have a ways to go to get this position where I want it in 2023, being only about 1/8 of the way into my position building process.
This is part of a three-pronged approach to retail that I am taking for early 2023. I am in Home Depot (HD) as homeowners will not likely be able to trade up for the near future. I am in TJX (TJX) , as that firm is uniquely positioned to benefit from the bloated inventories we see across the retail landscape.. and I am now long DLTR in anticipation of a more financially driven US consumer.
Readers will see that as the stock price took a dive earlier this week, so did its RSI and daily MACD. This created an unfilled gap in between $156 and $159 that will probably have to fill at some point. The shares now struggle with support at their 50 day SMA.
Dollar Tree
Target Price 1: $177
Target Price 2: $195.
Pivot 1: 200 day SMA ($154)
Pivot 2: $170 (right side of cup)
Add: 50 day SMA down to $145 (former resistance)
Panic: Break of $145.
