Earnings preview: Q2 results may set the tone for Dollar Tree’s turnaround

Though supermarket chain Dollar Tree (NASDAQ: DLTR) had a weak start to 2019, the recovery of its Family Dollar segment in the first quarter was something to cheer about. While second-quarter results are set to benefit from the efforts to regain traction through store remodeling and promotional activities, it might not be sufficient to overcome the underlying weakness.

The bad news is that the revival of Family Dollar comes at a price – the ongoing closure of scores of stores across the country will affect sales volume.

Outlook

The July-quarter report is scheduled to be published on Thursday at 7:30 am ET. The market is not very optimistic about the company’s bottom-line and predicts a 30% decline in earnings to $0.81 per share. The estimate for revenue is $5.72 billion, up 3.40% year-over-year.  The profit forecast is above the management’s guidance while the sales outlook is broadly in-line. The company’s earnings have beaten estimates twice in the previous four quarters.

Squeezed Margins

Margins remain under pressure from heavy spending on the turnaround initiatives while the tariff war keeps hurting sales of the company, which sources a significant portion of its merchandise from China. A de-escalation of the trade war will be very helpful for the discount retailer as far as long-term prospects are concerned. Meanwhile, it is expected that the management’s decision to start selling alcohol at Family Dollar stores will catalyze the turnaround process going forward.

Looking Back

High logistics costs, amid volatility in oil prices, and rising payroll expenses may restrict margin growth in the second quarter, as they did in the previous quarters. The management expects to incur additional costs of more $100 million, from the Family Dollar reorganization process and store closures, in the to-be-reported quarter.

Related Dollar Tree Q1 2019 Earnings Conference Call Transcript

During the first three months of the fiscal year, margins shrunk by nearly one percentage point owing to store closures. Adjusted earnings dropped 4% annually to $1.14 per share despite sales rising 5% to $5.81 billion, aided by a 2.2% growth in comparable-store sales.

Others

Dollar General (DG), the deep-discount retailer that competes with Dollar Tree, will be releasing its second-quarter results on August 29 before the opening bell. Last week, Target Corp. (TGT) reported stronger-than-expected earnings of $1.82 per share for the second quarter, on a 4% revenue growth.

At the beginning of this month, Dollar Tree shares were trading at their lowest so far this year, but recovered in the following days. The stock has gained 18% since last year and is trading near the $95-mark.

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