Analysts expect Dollar Tree (DLTR) to report another dismal quarter tomorrow. In the last two quarters, the retailer’s earnings have missed Wall Street’s earnings expectations and fallen YoY (year-over-year). In the third quarter, analysts expect the company’s adjusted EPS to fall 4.5% YoY to $1.13, near the higher end of Dollar Tree’s EPS guidance of $1.07–$1.16.
Factors impacting Q3 earnings for Dollar Tree
We believe higher operating costs will more than offset Dollar Tree’s higher revenue. For the past few quarters, the company’s gross and operating margins have been softening due to higher costs.
Higher domestic freight, operating, and payroll costs have increased the company’s overall expenses, and markdowns and shrinkage in its Family Dollar business have weighed on its margins. In the second quarter, Dollar Tree’s gross and operating margins contracted by 140 and 220 basis points, respectively.
Nonetheless, analysts anticipate that sales initiatives will continue to grow the company’s top line. They expect its revenue to grow 3.7% YoY to $5.7 billion in the third quarter.
To drive sales, Dollar Tree is focusing on pricing competitively and optimizing, remodeling, and relocating stores. In the second quarter, the company opened 150 new stores and closed 305. It remodeled and relocated 19 stores and rebranded 106 Family Dollar stores into Dollar Tree stores.
These initiatives are bearing fruit, as reflected in the company’s second-quarter top line. Dollar Tree’s net sales increased 3.9% YoY, while its comparable store sales grew 2.4% YoY. We believe the company’s strategies will continue to drive its top line in the third quarter.
Furthermore, strong US retail sales growth should continue to boost Dollar Tree’s revenue. Its domestic retail sales are benefiting from healthy employment and higher wages. US retail sales grew 3.5% YoY in this year’s first half and 3.9% YoY in the third quarter.
Analysts bullish on DLTR stock
Despite having lower earnings projections for Dollar Tree in the third quarter, analysts are bullish on its stock. They seem to be optimistic about the company’s sales strategies. Although they could pressure margins in the near term, they could set a foundation for long-term growth.
Analysts became bullish about DLTR stock after the company raised its fiscal 2019 EPS guidance during its second-quarter release to $4.90–$5.11 from $4.77–$5.07.
After the company raised its earnings guidance, several analysts raised their target price for its stock. As a result, their average target price has increased by 4.2% to $116.56 from $111.81 on August 28.
Moreover, most (about 56%) of the 27 analysts covering Dollar Tree stock suggest “buy.” The remaining 44% suggest “hold.”
With a year-to-date gain of 20.7%, DLTR stock is one of the retail space’s top performers. The stock has outperformed the Dow Jones, which is up 19.5% this year, and the SPDR S&P Retail ETF (XRT), which has gained nearly 7%.