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Family Dollar’s Better Margins Drive DLTR’s 3Q17 Earnings

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Dollar Tree reports 25% jump in Q3 earnings, beats expectations again

Dollar Tree (DLTR) reported a solid 25% YoY (year-over-year) growth in adjusted earnings per share (or EPS) when it reported third-quarter results on November 21. Adjusted diluted EPS stood at $1.01, about 11 cents more than the Wall Street profit forecasts. Earnings also beat the upper end of management’s guidance range of 83–90 cents per share.

What drove 3Q17 margins?

At $1.67 billion, 3Q17 gross profit was 9.6% higher compared to the same quarter last year. Gross margin improved 90 basis points to 31.3% of sales, making it the sixth consecutive quarterly increase.

The majority of the improvement in the current quarter’s gross margin came from the Family Dollar segment, which a reported 130 basis points jump in profitability. As in the previous quarter, this improvement was driven by lower merchandise and distribution costs and fewer discounts.

Dollar Tree’s overall margins took a hit after the Family Dollar integration in fiscal 2015. However, the business has been showing continuous improvement over the years. Gary Philbin, president and CEO of Dollar Tree said, “Evidence of our progress can be seen in our third quarter results, positive 1.5% same-store sales, 130 basis point improvement in gross margin, and 60 basis point SG&A leverage, and a total of a 190-basis point increase in operating margin. Feedback we are receiving from our Family Dollar shoppers indicate they are seeing cleaner stores, greater values on the items our customers buy most often, improving product assortments, more consistent in-stocks, and better customer service in our stores.”

The Dollar Tree segment’s gross margin improved by 30 basis points to 35.1% of sales as the banner recorded lower occupancy and merchandise costs.

Investors looking for exposure to DLTR through ETFs can consider the SPDR S&P Retail ETF (XRT), which invests 1.53% of its total holdings in the company.

Read the next part of this series to learn about the company’s revised guidance, current valuations, and earnings potential.

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