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3Q17 Earnings Preview: What’s in Store for Dollar Tree?

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Part 3
3Q17 Earnings Preview: What’s in Store for Dollar Tree? PART 3 OF 5

Could Dollar Tree Continue Gross Margin Improvement in 3Q17?

How 3Q17 earnings could look

Dollar Tree (DLTR), North America’s leading discount variety store operator, is expected to release its 3Q17 results on November 21. Management expects a 2.5%–11% rise in earnings per share, which are expected to land between $0.83 and $0.90 during the quarter.

Wall Street’s average projections are toward the upper end of management’s outlook. Analysts, on average, expect an 11% rise in EPS or earnings per share to 90 cents.

The company outdid Wall Street’s bottom-line expectations in the second quarter and reported in-line earnings in Q1. EPS rose 37.5% in Q2 after improving 10% during the first quarter.

Could Dollar Tree Continue Gross Margin Improvement in 3Q17?

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What drove Dollar Tree’s H1 margins

Dollar Tree reported gross margin improvements of 50 and 20 basis points for Q1 and Q2, respectively. Year-to-date (YTD), the company has seen a 6.1% rise in gross profit to $3.25 billion. A fall in merchandise, occupancy, and freight costs—along with lower shrink, driven by favorable inventory—drove better margins, particularly at the Dollar Tree banner.

For the third quarter of 2017, Wall Street is looking for a 6.5% jump in gross profit to $1.6 billion. The gross margin is likely to land at around 30.7% of sales, 30 basis points better than the same quarter last year. If results fall in line with expectations, they will mark Dollar Tree’s sixth consecutive quarter of gross margin improvement.

Competitor Dollar General’s (DG) gross margin is projected at 29.8% for the third quarter, down ten basis points compared to 3Q16. The company has reported five consecutive quarters of falling gross margins. It’s expected to report third-quarter results on November 29.

Investors looking for exposure to Dollar Tree through ETFs can consider the SPDR S&P Retail ETF (XRT), which invests 1.3% of its total holdings in the company.

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