Dollar Tree Earnings: DLTR Plunge Isn’t All That Surprising

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In its defense, Dollar Tree (DLTR) had to pay for its acquisition of Family Dollar somehow, sometime. That sometime just happened to be the second quarter, pulling the company’s earnings into the red. On the other hand, a closer look at the numbers presented in the Dollar Tree earnings report posted on Tuesday morning suggests this pairing may not be as beneficial as some had initially envisioned.

Today's Plunge From DLTR Isn't Surprising, All Things Considered Granted, the union of Dollar Tree and Family Dollar only closed in early July, so it may be a bit early to deem DLTR stock as completely unworthy. However, some notable red flags are already waving.

Dollar Tree Earnings for Q2

Last quarter, Dollar Tree lost $98 million, or 46 cents per share of DLTR, on sales of $3.01 billion. Excluding the cost of the acquisition, however, Dollar Tree would have earned 67 cents per share of Dollar Tree stock.

Whether the operational numbers were solid or discouraging remains a matter of perspective.

On a revenue basis, the top line of $3.01 billion actually missed expectations for $3.04 billion. On a per-share basis, earnings of 67 cents topped estimates of 62 cents per share of DLTR, and handily topped the year-ago figure of 61 cents. Then again, with another $811.6 million worth of sales contributed by the newly-acquired Family Dollar, one would expect to see a wider profit.

The litmus test is, of course, same-store sales, and that’s where Dollar Tree really seems to impress. On a currency-adjusted basis, same-store sales were up 2.4% in the second quarter, topping same-store sales growth rates that competitor Walmart (WMT) managed to post in Q2.

Even then, however, same-store sales growth fell short of the 3.3% growth analysts were looking for, and it paled in comparison to the 2.8% same-store sales growth that peer Dollar General (DG) saw in its second quarter.

Reality Check

Yes, things could have been better for Dollar Tree last quarter. They could have been worse too, though, so what really prompted the 7% pullback from Dollar Tree stock on Tuesday?

The superficial answer is the outlook.

Though DLTR isn’t going to offer earnings guidance again until the dust from the Family Dollar acquisition settles, it did offer a revenue projection for the current quarter of $4.78 billion to $4.87 billion. Analysts had been expecting an average of $4.91 billion. For the full-year ending in January, Dollar Tree now plans on producing a top line of somewhere between $15.3 billion and $15.52 billion, versus analyst estimates of $15.57 billion.

The deeper, more philosophical prod for the 7% tumble from DLTR today may be growing doubts that the pairing of Dollar Tree and Family Dollar is going to bear as much fruit as first presumed.

Within the Dollar Tree earnings press release, CEO Bob Sasser noted:

“We are very pleased to have successfully completed the acquisition. We are now an organization with annual sales exceeding $19 billion, more than 13,800 stores across North America and a network of more than 145,000 associates. We remain confident in our ability to deliver $300 million in annual run-rate synergies by the end of the third year post-acquisition. This combination provides us with the unique opportunity to leverage our multiple banners to better serve a broader range of customers, while enhancing our ability to deliver long-term profitable growth for our shareholders.”

Fair enough. In retrospect though, $300 million in synergies for a company that generates $19 billion in sales isn’t much … only about 1.5% of revenue.

Retailing is a low-margin business, so that’s not to say the $300 million in synergies is meaningless. Dollar Tree only earned $600 million last fiscal year, while Family Dollar earned $284 million. Combined, with synergies, the profit figure should make its way toward $1.2 billion once the combined companies are in full swing. It’s not a game-changing improvement, though, and it’s not even going to be fully achieved for three years.

And then there’s the other reality — no matter how Dollar Tree’s leadership tweaks, streamlines, and repositions, it’s still ultimately competing with itself in too many markets. Hundreds of store closures will be needed to ensure the combined organization isn’t going head-to-head with itself, which creates a steady revenue growth headwind.

Bottom Line for DLTR

As the old saying goes, the grass is always greener on the other side. The Family Dollar acquisition looked like a winner before it was a done deal, but now that it’s here, it’s looking like less than it was billed as.

Things could still change. “Could” is a dangerous word, though, particularly when competitors like Dollar General seem to be capitalizing on the chaos created in the meantime.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/todays-plunge-dltr-isnt-surprising-things-considered/.

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