Earnings preview: Comps to drive Dollar Tree Q1 results

Dollar Tree (DLTR) is scheduled to release its earnings results for the first quarter of 2019 on Thursday before the market opens. The results will be hurt by the trade war between the Trump administration and China. However, the discount variety retail stores operator is likely to be benefited by higher comparable store sales backed by its competitive pricing and strategic store expansion plans.

The investment in store wages, higher domestic freight and distribution costs are likely to lift costs while the soft margin trend is hinting for a margin contraction. Also, higher costs related to certain initiatives are anticipated to hurt the operating income, which is likely to be lower in the first half of fiscal 2019.

However, the competitive pricing and its strategic store expansion plans including remodeling and relocations are predicted to benefit the comparable store sales. The top line will be driven by the company’s restructuring and expansion initiatives such as steady store openings and improvement of distribution centers. The store traffic and sales will be driven by its store optimization program with plans to install adult beverages and expand freezers.

Analysts expect the company’s earnings to fall 4.20% to $1.14 per share while revenue will rise by 4.20% to $5.79 billion for the first quarter. In comparison, during the previous year quarter, Dollar Tree reported a profit of $1.19 per share on revenue of $5.55 billion.

The company has surprised investors by beating analysts’ expectations twice in the past four quarters. It is expected that Dollar Tree will post upbeat results for the first quarter of 2019. Majority of the analysts recommended a “strong buy” or “buy” rating while expecting the stock to reach $111.40 per share in the next 52 weeks.

For the fourth quarter, Dollar Tree slipped to a loss from a profit last year, due to the goodwill impairment charge, including SKU rationalization markdown reserve related to the Family Dollar segment, impairment of certain store assets, and acceleration in non-cash deferred financing costs related to the prepayment of the term loan facility. Sales declined by 2.4% year-over-year.

During the quarter, Dollar Tree opened 143 stores and expanded or relocated 14 stores. Also, a total of 84 Family Dollar stores and 10 Dollar Tree stores were closed. Additionally, the company opened five Dollar Tree stores that were re-bannered from Family Dollar. As of February 2, 2019, Dollar Tree operated 15,237 stores in the US and Canada.

For fiscal 2019, the company plans to open 350 new Dollar Tree stores and 200 new Family Dollar stores, while closing the underperforming ones. The store reorganization is expected to result in the generation of $23.45 billion to $23.87 billion in sales this year. Full-year earnings are forecast to be between $4.85 and $5.25 per share.

For the first quarter, the company expects consolidated net sales in the range of $5.74 billion to $5.85 billion, due to a low single-digit rise in same-store sales for the combined enterprise. Earnings were anticipated to be in the range of $1.05 to $1.15 per share for the first quarter. According to the company, its ongoing growth initiatives will boost profitability in 2020, driving earnings per share up by 14% to 18%.

Shares of Dollar Tree ended Friday’s regular session up 0.99% at $98.42 on the Nasdaq. The market remained closed on Monday due to Memorial Day. The stock has risen over 3% in the past year and over 2% in the past three months.

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