Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 4Q17 Earnings Update
Prev. Ed.: Aug 2, 2017; 1Q17 Earnings Update
Brokers’ Recommendations: Positive: 72.7% (16 firms); Neutral: 27.3% (6); Negative: 0.0% (0) Prev. Ed.: 7;8;1
Brokers’ Target Price: $110.00 ( $21.14 from the last edition; 19 firms) Brokers Avg. Expected Return: 12.8%
*NOTE: Though dated May 18, 2018, the share price and broker material are as of Apr 23.
Note: A flash update was done on Mar 7, 2018, on 4Q17 Earnings Release
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table and PMES section. The extra figures in the Valuation table and PMES section come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Dollar Tree, Inc. (DLTR), through its subsidiaries, operates discount variety stores that offer merchandise at a fixed price of $1.00 in the United States.
Of the 22 firms covering the stock, 16 provided positive ratings and six assigned neutral ratings while no firm rendered a negative rating to the stock.
The outlook of the firms toward Dollar Tree is dealt with in the following paragraphs:
Positive or equivalent outlook (72.7%; 16/22 firms): These firms are bullish owing to Dollar Tree’s focus on retaining existing customers while attracting new ones. Additionally, the firms remain impressed with the company’s practice of returning strong customer value at favorable prices, compared with other players. Going forward, these firms are hopeful about top-line growth and expect margins to stabilize.
In addition, the company has worked diligently for quite some time to improve its operational procedures through better use of POS (point of sales) and inventory management technology, enhanced store level execution, and addition of new payment mechanisms.
The firms believe that the company is doing an exceptional job internally in managing controllable inputs such as reducing stem miles and increasing back-haul opportunities. Dollar Tree continues to generate robust comparable store sales (comps), reflecting its focus on low-priced wants and essential commodities. The rise in comps is attributable to increased traffic, competitive pricing and strategic store expansion plans.
Further, the firms believe that by acquiring Family Dollar, Dollar Tree has become strong enough to single-handedly counter competition from retail bellwethers in the dollar-discount store segment. Moreover, the transaction will help Dollar Tree in achieving operational and distribution efficiencies as well as cost synergies. Moreover, these firms are impressed with the company’s business operations and believe that its performance will be even better as the economy recovers, buoyed by its product assortment and flexible store concept.
Neutral or equivalent outlook (27.3%; 6/22 firms): These firms maintain a neutral stance because of the current challenging consumer environment. However, they are encouraged by the company’s competitive advantage in terms of merchandising, unique positioning at the $1 price point and the ability to execute new store plans, and manage overall expenses. Additionally, the firms believe that an increased penetration of consumables, which is driving comps, should enable leverage on selling, general and administrative (SG&A) expenses and above-average earnings growth.
Dollar Tree remains focused on improving mix and product quality, enabling flat ticket trends despite the economic headwinds faced by consumers. However, the company’s practice of sourcing merchandise from overseas markets exposes it to various risks associated with operating internationally, which may impede results. Though the firms favor Dollar Tree for its defensive profile, consistent comps performance and relatively strong unit growth, these remain wary as comparisons tend to be even more challenging in the future.
May 18, 2018
Overview
Brokerage firms identified the following factors for evaluating the investment merits of Dollar Tree:
Key Positive Arguments / Key Negative Arguments· Increased debit card acceptance in stores will positively impact comps and traffic.
· The company stands to benefit from investment in technology, a shift toward larger stores and expanded marketing and merchandising initiatives.
· Inventory management and solid expense control will likely support margins, going forward.
· With the acquisition of Family Dollar, the company will be able to offer broader and multiple assortments at more compelling prices. Moreover, the transaction will help in achieving operational and distributional efficiencies as well as cost synergies.
· The Deal$ acquisition provides the company with an opportunity to expand its presence in the Midwest and Southeast regions of the United States, and to test a multi-price point concept within its stores.
· Dollar Tree’s balance sheet is in good shape with a solid cash flow, which enables management to return value to shareholders through share repurchases.
· Dollar Tree is the fastest growing dollar store based on square footage growth. This enables it to negotiate with suppliers for lower prices and bring down corporate costs as a percentage of sales. / · Margin pressure is likely to continue based on the mix shift of merchandise to consumables and the addition of the low-margin Deal$ business.
· Dollar Tree’s discretionary product mix continues to hurt its sales trend as the current adverse macroeconomic backdrop weighs on the discretionary spending of its core consumer.
· SG&A expenses could rise due to high utilities and healthcare costs.
· Competition from large retailers, such as mass merchandisers, discount chains and drug stores, is likely to intensify, going forward.
· Inflation is a big risk for Dollar Tree, given the company's focus on the $1 price point and its related inability to raise prices to accommodate higher operating costs.
Founded in 1986 and headquartered in Chesapeake, VA, Dollar Tree Inc. is an operator of discount variety stores offering merchandise at a fixed price point of $1.00. Its stores successfully operate in major metropolitan areas, mid-sized cities and small towns. The company offers a wide range of quality everyday general merchandise in many categories, including house wares, seasonal goods, candy and food, toys, health and beauty care, gifts, party goods, stationery, books, personal accessories, and other consumer items.
The company’s stores are spread across 48 U.S. states, the District of Columbia and Canada. Its stores are supported by a nationwide logistics network of ten distribution centers.
Dollar Tree also owns an e-commerce platform – DollarTree.com – which sells its merchandise in bulk to individuals and small businesses as well as organizations. Through its online platform, the company advertises its in-store events and showcases its special and seasonal promotions for featured products.
The company’s website is http://www.dollartreestoresinc.com. Its fiscal year ends on the Saturday closest to Jan 31.
May 18, 2018
Long-Term Growth
Dollar Tree is considered to be one of the best-positioned dollar store concepts, especially with its evolving multi-price point chain. The firms believe that the company is doing a commendable job internally in managing controllable inputs, while increasing back-haul opportunities at the same time.
Although Dollar Tree has grown primarily through organic expansion, strategic acquisitions have also helped in augmenting this growth. The company remains well placed on its definitive growth plan, including increasing Dollar Tree store count domestically, raising existing store productivity and expanding in store categories.
Citing an example of strategic acquisition, the firms believe that Dollar Tree has hit the bull’s eye by acquiring Family Dollar. In fact, with this transaction, Dollar Tree has become a mega U.S. discount retailer that can counter competition single-handedly from retail bellwethers in the dollar-discount store segment. The combined chain is positioned to reach out to more value-seeking consumers through a network spanning across vast geographies. Additionally, the acquisition will enhance the buying power of the pair, providing better negotiating terms against suppliers. The combined company will be able to offer broader and multiple assortments at more compelling prices.
Dollar Tree’s long-term growth strategy remains intact. The company is progressing well with its growth initiatives, which include store expansion strategies, enhancement of store productivity, creating new store formats, tapping of new markets and incorporating innovative sales channels to serve its patrons better. Also, it is expected to continue to implement strategies such as increasing consumables mix, rolling out freezers/coolers at stores, along with multi-price point expansion to boost top-line performance. Also, in order to improve operating margin, the company is focusing on imported goods, supply chain efficiency and aggressive cost cuts.
May 18, 2018
Target Price/Valuation
Rating DistributionPositive / 72.7%
Neutral / 27.3%¯
Negative / 0.0%¯
Avg. Target Price / $110.00
Digest High / $130.00
Digest Low / $92.00
No. of Firms with Target Price/Total / 19/22
According to the firms, risks to the target price include less favorable exchange rates or increase in shipping rates raising the cost of imported products and the company's dollar price point, which does not allow it to hike prices to cover the higher costs. Other risks include rising real estate costs and higher cost of real estate for stores, declining profits and returns, continued under-performance of Dollar Tree's larger store format versus the rest of the chain, dragging down returns, and weakening of the economy.
Recent Events
On Mar 7, 2018, Dollar Tree posted fourth-quarter fiscal 2017 (4Q17) results, wherein adjusted earnings of $1.89 per share missed the Zacks Consensus Estimate by a penny. However, the metric rose substantially by $1.39 in the prior-year quarter. Further, consolidated net sales were up 12.9% year over year (y/y) to $6,360.6 million, missing the Zacks Consensus Estimate of $6,401 million.
Revenue
Provided below is a summary of revenues as compiled by Zacks Research Digest:
Revenue ($M) / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2016A / 2017A / 2018E / 2019EDigest High / $5,635.3 / $5,316.6 / $6,361.1 / $5,584.0 / $20,719.0 / $22,246.0 / $23,080.0 / $24,324.0
Digest low / $5,635.3 / $5,316.0 / $6,360.6 / $5,561.6 / $20,719.0 / $22,245.5 / $22,290.0 / $24,124.3
Digest Average / $5,635.3 / $5,316.6 / $6,360.6 / $5,573.1 / $20,719.0 / $22,245.5 / $22,845.1 / $24,241.5
Y-o-Y Growth / 5.0% / 6.3% / 12.9% / 5.4% / 33.7% / 7.4% / 2.7% / 6.1%
Q-o-Q Growth / 12.7% / 0.7% / 19.6% / -12.4%
The Zacks Digest average revenue in 4Q17 was $6,360.6 million, up 12.9% y/y and 19.6% sequentially. Comps in the quarter increased 2.4% in constant currency, driven by improved customer count and average ticket. Including the impact of Canadian currency fluctuations, the metric improved 2.5%. While Dollar Tree banner posted comps growth of 3.8% (in constant-currency), comps at the Family Dollar banner rose 1%.
Guidance
Management issued guidance for first-quarter and fiscal 2018. For fiscal 2018, it projects consolidated net sales to be $22.70-$23.12 billion, with low single-digit comps increase and a 3.7% rise in square footage.
For 1Q18, the company forecasts consolidated net sales for the first quarter to be $5.53-$5.63 billion, with low single-digit comps growth.
For more details on revenue by individual firms, please refer to the ‘Consensus’ tab of the DLTR spreadsheet.
Margins
Provided below is a summary of margins as compiled by the Zacks Research Digest:
Margins / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2016A / 2017A / 2018E / 2019EGross Margin / 32.1% / 31.3% / 33.0% / 31.0% / 30.9% / 31.6% / 31.7% / 31.7%
Operating Margin / 10.5% / 8.0% / 11.7% / 8.0% / 8.3% / 9.1% / 8.6% / 8.7%
Pretax Margin / 9.4% / 6.7% / 10.7% / 6.7% / 7.1% / 7.8% / 7.5% / 7.9%
Net Margin / 5.8% / 4.5% / 7.1% / 5.3% / 4.4% / 5.2% / 5.8% / 6.1%
Note: Blank cells indicate brokers have not provided estimates
The Zacks Digest average gross profit increased 16.3% y/y to $2,101 million in 4Q17, with the gross margin expanding 90 basis points (bps) to 33%. The margin expansion was backed by reduced merchandise costs, lower markdowns and occupancy expenses as a percentage of sales. The increase was somewhat compensated with higher freight charges.
Adjusted selling, general and administrative expenses dropped 40 bps to 21.3% of sales, thanks to reduced depreciation, lower repair and maintenance costs as a percentage of sales. This was somewhat offset by increased hourly payroll and incentive compensation expenses as well as higher advertising expenses.
Further, operating income rose 30.5% to $765.6 million in 4Q17. Adjusted operating margin came in at 11.7%.
For more details on margins by individual firms, please refer to the ‘Consensus’ tab of the DLTR spreadsheet.
Earnings per Share
Provided below is a summary of EPS as compiled by Zacks Research Digest:
EPS / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2016A / 2017A / 2018E / 2019EDigest High / $1.42 / $1.01 / $1.89 / $1.27 / $3.91 / $4.87 / $5.77 / $6.64
Digest Low / $1.36 / $1.01 / $1.89 / $1.18 / $3.68 / $4.82 / $5.43 / $5.95
Digest Average / $1.38 / $1.01 / $1.89 / $1.23 / $3.83 / $4.86 / $5.60 / $6.29
Y-o-Y Growth / 31.4% / 26.1% / 36.9% / 25.8% / 43.9% / 27.1% / 15.2% / 12.3%
Q-o-Q Growth / 72.4% / 2.0% / 87.0% / -34.7%
The Zacks Digest average EPS for 4Q17 came in at $1.89, up 36.9% from 4Q16 and 87% from 3Q17. Earnings came at the higher end of the company’s guided range. The year-over-year improvement can be attributed to higher sales, the rise in comps and higher margins.
On a GAAP basis, earnings per share came in at $4.37 compared with $1.36 in the year-ago quarter.