Dollar Tree Constricts Its Earnings Outlook, and Shares Follow Suit – Nasdaq

In the markets, a corporation's fortunes may turn on a dime; more often, they turn on a quarter -- a reporting quarter, that is. The narrative Dollar Tree(NASDAQ: DLTR) provided last quarter of improving health in its Family Dollar segment was completely forgotten as a reduced full-year outlook became the dominant story line. Shares of theconsumer staples giant withered by as much as 17% on Tuesday following the company's release of fiscal third-quarter 2019 earnings. Let's unpack the last three months and trace the roots of investor displeasure, bearing in mind that allcomparative numbers refer to those of the prior-year quarter.

Data source: Dollar Tree. EPS = earnings per share.

Image source: Getty Images.

Dollar Tree's fourth-quarter outlook anticipates a bit of stumbling at year-end. The company expects low-single-digit comps growth next quarter, resulting in expected revenue of$6.33 billion to $6.44 billion. At the midpoint of this range, the fourth quarter's top line will advance by just 2.8% over the prior-year period.

Management quantified the fourth-quarter impact of trade import tariffs under Sections 301-310 of the U.S. Trade Act of 1974, more commonly referred to as Section 301 tariffs. Dollar Tree estimates that Section 301 tariffs imposed on its imports from China will inflate its cost of goods sold by $19 million, or $0.06 per share, in the final three months of the year. Fourth-quarter diluted EPS, including this impact, is expected to land between $1.70 and $1.80.

At the midpoint of this range, EPS will fall below diluted EPS of $1.93 achieved in the fourth quarter of fiscal 2018 (after adjusting for a number of one-time charges the company incurred during that period). The expected tariff impact accounts for one-third of the drop of $0.18 between last year's fourth-quarter EPS and the midpoint of the current projected range. The rather weak fourth-quarter sales growth and some additional expected margin obstacles are supplying the rest of the differential.

The company characterizes these obstacles as "additional pressure on merchandise margin based on lower-margin consumables growing faster than originally forecast; payroll cost pressure in distribution centers; and increased run rates for repairs and maintenance, utilities, and depreciation."

The year-end weakness also affects Dollar Tree's full-year forecast. Management tightened its fiscal 2019 revenue expectation to a range of $23.62 billion to $23.74 billion from a previous range of$23.57 billion to $23.79 billion. Diluted EPS for the 12-month period is now projected to land between $4.66 and $4.76. This is well below the $5.45 in fiscal 2018 adjusted EPS. Moreover, just last quarter, management raised the EPS targetto a range of $4.90 to $5.11 from an original projection of$4.77 to $5.07.

How did Dollar Tree's profit picture erode so quickly? Slower retail shelf growth is a prime culprit. Essentially, as the company has focused on closing underperforming Family Dollar stores this year, its net store openings have curbed significantly. The organization expanded total selling square footage by 3% in fiscal 2018,but is on pace to increase retail selling space by just 1.1% this year.

Without brisk net store additions, Dollar Tree must rely on same-store sales for most of its revenue growth. But as comps have remained soft in the low-single-digit range, the dollar store specialist has lost the ability to easily absorb rising cost pressures. Of course, management has mostly stabilized the Family Dollar business in 2019, so the pace of net store openings should presumably rise again in the coming quarters, supporting revenue and providing much-needed operating leverage. But that's likely of meager solace to shareholders checking on their DLTR positions, awash in red, today.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Dollar Tree Constricts Its Earnings Outlook, and Shares Follow Suit - Nasdaq