FINANCE

Dollar Tree Q3 profit and sales beat estimates

BY Marianne Wilson

The nation’s largest dollar-store retailer on Tuesday posted better-than-expected sales and earnings results, fueled by a boost in customer traffic and spending in its stores.

Dollar Tree’s net income increased $68.3 million to $239.9 million for the quarter ended Oct. 28. Earnings per share increased 40.3% to $1.01, compared to $0.72 in the year-ago period. Analysts on average had expected earnings of 90 cents per share.

Consolidated net sales increased 6.3% to $5.32 billion from $5.00 billion last year. Analysts had forecast sales of $5.28 billion

Same-store sales increased 3.2%, more than analysts expected, driven by increases in average ticket and comparable transaction count. By brand, same-store sales rose 5% for Dollar Tree and 1.5% for Family Dollar.

“Our team delivered terrific results in the third quarter,” stated Gary Philbin, president and CEO. “Same-store sales accelerated in both the Dollar Tree and Family Dollar banners; we delivered a 120 basis point improvement in enterprise operating margin; and earnings per share grew more than 40% from the prior year.”

During the quarter, the company opened 169 stores, expanded or relocated 23 stores, and closed six stores. It ended the period with a total of 14,744 stores.

Analyst Neil Saunders, managing director of GlobalData Retail, noted that while low price is important to the success of Dollar Tree, it is not the only factor driving sales.

“Indeed, it is notable that many of the group’s core customers have seen their financial positions improve modestly over the course of this year, yet their loyalty and share of spending at both Dollar Tree and Family Dollar have largely remained the same or increased,” he said. “One of the main reasons for this is that they like the convenience and localness of the stores in addition to the low prices they offer.” For more, click here.

The company estimates consolidated net sales for the fourth quarter of 2017 to range from $6.32 billion to $6.43 billion, based on a low single-digit increase in same-store sales for the combined enterprise. Diluted earnings per share are estimated to be in the range of $1.80 to $1.89.

Consolidated net sales for full-year fiscal 2017 are now expected to range from $22.20 billion to $22.31 billion compared to the company’s previously expected range of $22.07 billion to $22.28 billion. This estimate is based on a low single-digit increase in same-store sales and 3.7% square footage growth. Dollar Tree now anticipates net income per diluted share for full-year fiscal 2017 will range between $4.64 and $4.73, compared to its previous guidance of $4.44 to $4.

“Our stores and teams are well-prepared and energized as we enter the fourth and final quarter of 2017,” said Philbin. “We are confident in our ability to continue driving positive same-store sales, through meeting our customers’ needs and wants; improving enterprise operating margin; and delivering year-over-year earnings per share growth. We believe we are well-positioned in the most attractive sector in retail and will remain intensely focused on delivering great value and convenience to our growing customer base.”

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Analysis: Dollar Tree’s convenience play critical to its success

Building on the progress made in the first half, Dollar Tree has posted a robust set of third-quarter numbers — although the uplifts come off the back of a modest performance during the prior year. Both the Dollar Tree and Family Dollar fascia delivered growth, with same-store sales up by 5.0% and 1.5%, respectively.

The acceleration of sales is encouraging, not least because it has been delivered against the backdrop of a much more competitive market where many retailers are focusing more on price as a means of driving custom. Moving into the final quarter, it does not look as if price competition will ease up; if anything, it will likely intensify.

Despite this, we are broadly optimistic about dollar store formats. We believe the one-dimensional pricing structure, which makes it difficult to overspend, is a key point of difference and helps to cement the perception of value for money. This is borne out by our customer data, which show that the value for money and price ratings for both Dollar Tree and Family Dollar strengthened slightly over the past six months.

Important though it is, low price is not the only factor that is helping to drive sales. Indeed, it is notable that many of the group’s core customers have seen their financial positions improve modestly over the course of this year, yet their loyalty and share of spending at both Dollar Tree and Family Dollar have largely remained the same or increased. One of the main reasons for this is that they like the convenience and localness of the stores in addition to the low prices they offer.

The convenience play is one that is often overlooked when it comes to the success of dollar formats. However, for many consumers — including more affluent shoppers — it is a critical differentiator. This is one of the reasons why Dollar Tree sees the potential for many more U.S. stores (up to 10,000 Dollar Tree outlets and 15,000 Family Dollar shops). In our view, while there is certainly more headroom for growth, we think the company’s projections are overly optimistic.

New stores in the U.S. are not the only strategy in the company’s playbook. The expansion into Canada and the growth of Dollar Tree Direct are both initiatives that are helping to drive growth.

Dollar Tree Direct is a small part of the business and given the low margin nature of most products its economics are questionable. However, we believe it is helping to increase the exposure of the Dollar Tree brand. We also think it gives Dollar Tree a stake in a channel that will, beneficial to profits or not, become more critical for the value players over the next five or so years.

The Canadian operation is also a relatively small part of the business. However, early results are encouraging, and despite competition in the Canadian market, Dollar Tree has found success. Longer term the company is aiming for 1,000 stores north of the border, which does not seem unrealistic.

While the sales line looks strong, the bottom line is also benefitting from cost savings and continued synergies from the integration of Family Dollar. With net income up by 39.8% this quarter and with strong cash flow, Dollar Tree is delivering good returns and, in our view, will continue to do so.

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Urban Outfitters surprises in Q3 on strong earnings, sales

BY Marianne Wilson

Urban Outfitters on Monday reported sales and earnings that blew past Wall Street estimates, fueled in part by a strong performance from its Free People brand and online sales.

Urban Outfitters earned $45.1 million, or 41 cents a share, in the quarter, compared with $47 million, or 40 cents a share, in the year-ago period. Analysts had expected per-share earnings of 33 cents a share

Sales rose 3.5% to $893 million, a record for the company, Urban Outfitters said. Analysts had expected sales of $861 million.

Same-store sales, which include the comparable direct-to-consumer channel, rose 1%. Excluding the estimated impact of the North American hurricanes in the quarter, comparable retail segment net sales increased 2%. By brand, comparable retail segment net sales increased 5% at Free People, 2% at the Anthropologie Group and 1% at Urban Outfitters.

“Record sales were driven by improved apparel execution across all channels and brands,” said Richard A. Hayne, CEO.

Neil Saunders, managing director of GlobalData Retail, said that despite the company’s good quarter, there are still some weaknesses in Urban Outfitters’ performance, including “over-reliance” on its Free People brand.

“Urban Outfitters, and to a lesser extent Anthropologie, are still dropping off the radar of some consumers,” he said. “To remedy this, both brands need to develop a much clearer and more compelling handwriting that resonates with the core customer.” For more, click here.

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