Dollar Tree (DLTR) stock fell 13% during pre-market trade today. The company reported lower-than-expected third-quarter earnings results and cut its fiscal 2019 EPS guidance. The company’s third-quarter EPS of $1.08 fell short of analysts’ estimate of $1.13. Notably, the sequential earnings fell 8.5% on a YoY (year-over-year) basis.
However, Dollar Tree continued to report higher sequential revenues. The company’s third-quarter revenues increased 3.7% YoY to $5.75 billion and beat analysts’ expectations of $5.74 billion. Meanwhile, the company’s enterprise same-store sales rose 2.5% segment-wise. The same-store sales growth in the Dollar Tree and Family Dollar banners increased 2.8% and 2.3%, respectively. Both of the segments recorded an increase in the average ticket and the transaction count.
What hurts Dollar Tree Q3 earnings?
The higher cost of goods sold and operating expenses more than offset the benefit of increased revenues. The company’s cost of goods sold grew 4.5% YoY to $4.04 billion. As a result, Dollar Tree’s third-quarter gross margin fell by 50 basis points YoY to 29.7%. Increased sales of lower-margin products and higher freight and distribution costs mainly contributed to the gross margin reduction.
The company’s SG&A expenses rose 4.8% YoY to $1.35 billion. As a percentage of the revenues, the SG&A expenses reached 23.5% compared to 23.2% in the same quarter last year. Higher costs associated with store support centers, asset disposals of closed stores, and increased depreciation expenses mainly drove the SG&A expenses.
As a result of higher costs, Dollar Tree reported a 7.6% YoY decline in its third-quarter operating income. The operating margin contracted by 80 basis points YoY to 6.2%.
The company continued with its store optimization strategy. During the quarter, the company opened 165 new stores. The company relocated and expanded 15 stores, while it shut down 42 stores. Also, the company opened 39 rebranded Dollar Tree stores, which were under the Family Dollar banner earlier.
Dismal fourth-quarter outlook
Dollar Tree provided a disappointing fourth-quarter outlook. The company expects tariffs on Chinese imports to increase its cost of goods sold by $19 million or $0.06 per share. Dollar Tree also expects higher sales of low-margin merchandise and rising wages at distribution centers to hurt its fourth-quarter bottom-line results.
Including tariffs and the other costs mentioned above, Dollar Tree expects its EPS to be $1.70–$1.80 in the fourth quarter. The company’s guidance range is way behind Wall Street analysts’ estimate of $2.02. For the quarter, the company expects revenues of $6.33 billion–$6.44 billion. Meanwhile, analysts expect revenues of $6.41 billion.
Considering the impact of increased costs due to tariffs, store closures, and discrete items, Dollar Tree lowered its fiscal 2019 earnings guidance. The company expects an EPS of $4.66–$4.76—down from the previous range of $4.90–$5.11.
Dollar Tree has trimmed its fiscal revenue outlook to $23.62 billion–$23.74 billion from $23.57 billion–$23.79 billion. The mid-point of the revised guidance remains the same at $23.68 billion. The company projects mid-single-digit growth in comparable-store-sales and a 1.1% increase in selling square footage.