I knew that Dollar Tree (DLTR) was set to report on Wednesday morning. Beyond that, the stock was not within my field of vision. The firm did manage to beat expectations for adjusted quarterly earnings. Before moving on, both gross margin and operating margin did manage to beat the street. That concludes the good news portion of this article. Let's proceed. Dollar Tree reported adjusted EPS pf $1.79 for their fourth quarter, beating consensus by four cents. Revenue landed at $6.32 billion, good enough for annual growth of 1.8%. Not good enough for Wall Street though. The street had been looking for something closer to $6.4 billion.
The real disappointments would be found in comparable sales and in guidance. Let's take a look. Same store sales landed at growth of 0.4%, badly missing the 1.7% that had been expected. Broken down, by brand, stores bearing Dollar Tree signage saw comp growth of 1.4%, versus consensus of 2.2%. Family Dollar stores were overtly the weak link, experiencing a sales decline of 0.8% versus expected growth of 1.3%. In order to combat this under-performance, the firm has announced that support teams for both brands are now working under one roof, and have consolidated leadership.
Why this is so important is because Family Dollar is a significant business in it's contribution, or lack thereof ... to the whole. While Family Dollar stores contribute 44.3% of total net sales, the brand accounts for just 34% of gross profits. Even worse, the Family Dollar brand actually prints negative in terms of Operating income. For the quarter, Dollar Tree contributed $561 million in operating income, while Family Dollar landed at $-240.5 million.
Guidance
Now, guidance is a little tricky. The firm tells us up front that their forward outlook does not include any impact from the spread of the coronavirus on supply chains nor consumer demand. While that is quite understandable, given that these potential impacts are impossible to quantify at this time, it also quite possibly, or maybe even probably unrealistic. Does that make the guidance meaningless? Again, an impossible question to answer.
All that said, the guidance provided was light anyway, sans those unwelcome impacts. The firm sees Q1 revenue of $5.89 billion to $6.02 billion versus the $6.03 billion that industry analysts are looking for. The firm expects EPS of $1.00 to $1.09. The street was up at $1.20 on that line. For the full year, the firm looks for EPS of $4.80 to $5.15 on revenue of $24.21 billion to $24.66 billion. The full year guidance does include a $62 million impact from trade related tariffs as well as regulatory changes regarding transport.
The Chart
Yes, these shares did trade above $119 as recently as November. Betting on this name is a bet that the firm is making a bottom, or that the firm is taking the necessary steps toward fixing what ails the Family Dollar chain. Clearly, the firm is cognizant of and addressing that issue. Omitting the spreading virus from guidance makes committing capital here a gamble.
Technically, traders will look to the possibility of support at the lower trend line of this not fully formed Pitchfork model. Dollar Tree does not pay a dividend, so there is no real incentive to take on this risk away from a belief in the name if traders believe in the name.
A trader expecting the shares to make a run at the 50 day SMA at some point in the next three months could put on, or get long, a bull call spread. My example in minimal lots would look like this...
- Purchase one DLTR June $82.50 call for roughly $6.00
- Sell (write) one DLTR June $90 call for a rough $3.00
Net Debit: $3.00
Note: The trader would be placing a $3 bet to try to win back $7.50 in June. The point is that this is a bullish bet, that in essence caps the risk at $3. I see no reason to get more aggressive than that.
