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Do Analysts Foresee Improvement in Dollar Tree’s Profitability?

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Aug. 18 2020, Updated 9:26 a.m. ET

Earnings in the recently reported quarter

Dollar Tree’s (DLTR) EPS rose 16.8% to $1.18 in the third quarter of fiscal 2018, which ended on November 3, 2018. The company’s EPS came in ahead of analysts’ expectation of $1.14. Dollar Tree’s bottom line growth was driven by higher sales, lower interest expenses, and lower taxes.

Dollar Tree’s adjusted EPS rose 18.1% to $3.52 in the first nine months of fiscal 2018.

Dollar Tree’s gross margin, as well as its operating margin, contracted in the third quarter of fiscal 2018 as well as in the first nine months of fiscal 2018. The company’s gross margin contracted ~70 basis points to 30.3% in the first nine months of fiscal 2018 due to higher shrink costs, higher distribution costs, increased domestic freight costs, and a rise in occupancy costs resulting from increased real estate tax expenses.

Dollar Tree’s operating margin contracted to 7.3% in the first nine months of fiscal 2018 compared to 7.8% in the first nine months of fiscal 2017. This contraction was the result of a lower gross margin and higher store payroll costs.

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Valuation and analysts’ expectations

On January 30, Dollar Tree and Dollar General (DG) were trading at 12-month forward PE multiples of 16.5x and 17.3x, respectively. Analysts expect Dollar Tree’s adjusted EPS to rise 12.1% to $5.45 in fiscal 2018 and 6.6% in fiscal 2019. For the fourth quarter of fiscal 2018, analysts expect Dollar Tree’s EPS to rise 1.6% to $1.92.

Analysts expect Dollar General’s adjusted EPS to rise 31.5% to $6.01 in fiscal 2018 and 11% in the next fiscal year.

Dollar Tree expects its fiscal 2018 fourth-quarter EPS to be in the $1.86–$1.95 range and its fiscal 2018 EPS to be between $4.86 and $4.95. Higher-than-expected freight costs and wages are likely to put pressure on the company’s profitability.

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