Dollar Tree's ( DLTR) stock was a little weak on Wednesday morning. Was it the guidance? The quarter, after all, was solid. Sort of.
The discount retailer's fiscal fourth quarter, which ended Jan. 28, revealed unadjusted earnings per share of $2.04 on revenue of $7.72 billion. Both numbers beat Wall Street's expectations. The sale sprint was good enough for year-over-year growth of 9%. Same store sales were 7.4% across the entire company.
Broken out by brand name, Dollar Tree locations grew comp sales 8.7%, while Family Dollar locations were able to increase comp sales just 5.8% vs. the year-ago period. Operating income increased 6.8% to $618.1 million, as that comes to 8% of total sales. This was down from 8.2% a year ago. Net income actually contracted a bit to $452.2 million, which comes to 5.9% of total sales. This was down from 6.4% for the year-ago comp.
Segment Performance
Dollar Tree: Generated sales of $4.297 billion (+9.6%), producing gross profit of $1.578 billion (+13%) on a gross margin of 36.7% (up from 35.6%). This resulted in operating income of $721.3 million (+22.7%) on an operating margin of 16.8% (up from 15%).
Family Dollar: Generated sales of $3.42 billion (+8.3%), producing gross profit of $807.9 million (+9.1%) on a gross margin of 23.6% (up from 23.4%). This resulted in operating income of $1.4 million (down from $86.8 million) on an operating margin of 0.0% (down from 2.7%).
During the quarter, the company opened 123 new stores, relocated 38 stores, and closed 77 stores. All this, while renovating 112 Family Dollar locations. Hence, the lack of operating profit from that segment.
Guidance: For fiscal 2023, the company sees full-year earnings per share of $6.30 to $6.80. Wall Street had been looking for something above $7.30 for this number. This will also include a benefit estimated at $0.29 due to a 53rd week. DLTR see approximate operating expense investment of $1.45 per share and assumes only a minimal benefit from investments. Investments that were made are expected to beat more attractive returns by 2024 and beyond. As far as same-store sales are concerned, for the year, the retailer expects to see a low single-digit increase for the flagship Dollar Tree branded stores, but a mid-single digit increase for Family Dollar locations.
Fundamentals: For the quarter reported, Dollar Tree drove operating cash flow of $1.615 billion. Out of that comes capital expenditures of $1.249 billion, leaving the firm with free cash flow of $366 million. This is down moderately from $411 million for the year-ago comp.
Turning to the balance sheet, the Dollar Tree ended the period with a cash position of $642.8 million and inventories valued at $5.449 billion. Cash was down from a year ago, but this took current assets up to $6.367 billion. Current liabilities add up to $4.225 billion, leaving the firm's current ratio at a healthy looking 1.51. But with most of the firm's current assets inventory, this is a potential issue as managing this merchandise will suppress margin. The firm's quick ratio is a rather awful looking 0.22.
Total assets amount to $23.022 billion, including $5.083 billion in "Goodwill" and other intangible assets. at 22.1% of total assets, I do not find this problematic. Total liabilities less equity comes to $14.271 billion. This includes $3.422 billion in long-term debt.
Well, I am not going to tell you that this is some fantastic balance sheet. Obviously, cash has to be brought into better balance with the debt-load and the way to get there is through effective inventory management. Yikes.
My Thoughts
The guidance on profitability was a sharp kick in the pants. This is why the shares are traded lower this morning... These shares had been trading at about 20 times forward looking earnings in anticipation of a tough economy going forward. Dollar Tree is still spending on spicing up the Family Dollar side of the business. The stock has turned its direction around as the first hour of trade has progressed.
I do think however, that through laying out very conservative guidance that should an economic slowdown drive the budget minded shopper toward the shallow end of the pool, that this could not only still benefit retailers such as this to a significant degree, such an environment could also help bail them out of a sizable portion of their inventory situation. In short, I am long Dollar Tree, and had expected to get longer if the sell-off had persisted.
The shares appear to be building a closing pennant pattern, though it remains a long way from becoming fully developed. For now, the 200-day simple moving average, which has been flirted with today, remains our pivot. My current target price is $173. I add down to the 50-day simple moving average and I panic on a break of that lower trendline.
