Someone needs to catch Dollar Tree (DLTR) management up to the present. In its earnings release on Wednesday morning before the opening bell, the company discussed the additional impacts tariffs would have on its Q1 FY 2020. They added the current financial projections do not include any potential impact from COVID-19. Tariff discussions feel so 2019 at this point.
There's a positive and negative to draw from this. The positive is that the tariff issue could be resolved, providing a potential boost to Dollar Tree, or tariffs could be suspended if the virus outbreak worsens. The negative aspect of that latter part is Dollar Tree isn't accounting for any negative impact of COVID-19. If tariffs are temporarily suspended for that reason, there's a good chance the company's benefit from the lack of tariff impact will be offset by the negative impact of COVID-19. While I don't view their guidance as aggressive in any way, they may have been better served to go more conservative here and do a bit of a kitchen sink dump.
Next year should bring about renovations of 1250 Family Dollar stores which is much-needed after that part of the company posted a sale store sales decline of .8% versus the Dollar Tree stores increasing 1.4%. Overall, sales for Q4 were $6.32 billion, up 1.8% year-over-year, but slightly short of consensus. Earnings of $1.79 came in near the very top end of the estimated range and four pennies above Wall Street's expectations.
While Dollar Tree found a way to make the bottom line work despite tepid growth on the top line, the same doesn't hold for Q1 FY2020 or the full year for that matter. Revenue for Q1 will be a smidge below expectations, but EPS guidance is $1.00 to $1.09 versus estimates of $1.20. For the full-year, EPS should land between $4.80 and $5.15 versus $5.29. That's a midpoint which is $0.315 below estimates with about half of that miss expected to come in Q1. That doesn't paint great expectations for a second half, although my guess is the remainder of that miss would occur in Q2, and a bit in Q3.
During FY2019, the company repurchased $200 million in shares. It still has $800 million authorized under its current buyback plan which equals approximately 4% of the current market cap, but I thought it worth noting the overall share count used for diluted EPS calculations barely budged year-over-year despite the buyback.
The $81 level for the stock appears to be of huge importance this week. A close under $81, although I'd be more inclined to use $80, creates a huge head and shoulders potential plus places bulls under support going back two years. We saw it hold in June 2018, then again in the fall and winter of 2018, before shares gained 50% during 2019. Now, Dollar Tree has given back the entire move and threatens to test the $65 to $70 area. One might think the company could do well stocking up on hand sanitizer and toilet paper, but that won't move the needle on $24 billion in sales.
I'm apt to sit this one out on the long side or even consider puts below $80. After the recent downturn, there's many superior risk-rewards out there for your hard-earned dollar.
