The stock market’s reaction to the earnings report from Dollar Tree, Inc. (NASDAQ:DLTR) is a perfect example of how the market can take down a stock for very poor reasons. DLTR stock has certainly been on fire lately, and perhaps it got ahead of itself, but the earnings report was generally quite good.
I’m going to show you just how good it was, why I think DLTR stock is a buy, and perhaps find a reason why the market reacted the way it did.
DLTR Stock: The Earnings Results
For the fourth quarter, sales increased 13% to $6.36 billion, up from $5.64 billion last year. Comparable same-store sales were up 2.4%. For a retail operation like Dollar Tree stock, that’s perfectly acceptable. This is particular true because the comps were driven both by an increase in the average ticket size as well as the number of transactions.
There was also a 90 basis point improvement in gross profit, up to 33%, because the company was able to reduce the cost of some merchandise and occupancy. Thus, gross profit jumped up about $300 million, although a portion of that is due to the fact that this was a 14-week quarter instead of the customary 13-week quarter.
On a net income basis, if we assume the tax rate to be the same as last year, DLTR stock came in at $450 million, compared to $322 million last year. On a prorated basis, meaning a 13 week quarter reflected in this year’s results to match last year’s 13 week quarter, net income came in at $416 million. That’s an increase of almost 30%. That’s extraordinary.
So why did DLTR stock fall? I don’t quite see why, considering the top line only missed by $40 million, which is less than 1%. Same-store sales were expected to come in at 2.7% instead of 2.4%. And adjusted earnings came in at a $1.89-per-share instead of the $1.90-per-share estimate. Boo hoo.
For the full year, the numbers were also quite strong. Sales rose from $20.7 billion to $22.2 billion. Gross profit rose from $6.4 billion-$7 billion, including an 80-basis-point margin increase. Net income rose from $896 million to $1.1 billion, an increase of 23%. That’s about $4.67-per-share.
I guess the market was also upset by the outlook for 2018. Sales are predicted to be in a range between $22.7 billion and $23.1 billion. The midpoint would be $22.9 billion, an increase of about 4%. Earnings-per-share would come in at a midpoint of $5.42, an increase of about 16%. With Wednesday’s closing price of DLTR stock at $89, DLTR stock trades at 16x 2018 estimates.
Bottom Line on Dollar Tree Stock
Thus, thanks to Wednesday’s markdown, Dollar Tree stock appears to be fairly valued. In fact, I might even argue that because it is a growth stock, it might even be undervalued.
Meanwhile, the balance sheet has seen significant improvement. Over the course of the year, DLTR stock reduced long-term debt by $1.4 billion, almost 22% of its entire debt load. It also increased its cash position from $866 million to $1.1 billion. Meanwhile, the company generated a little over $1.1 billion in free cash flow.
To me, everything looks hunky-dory for Dollar Tree stock. I would use this opportunity to grab up some shares of DLTR, which are trading close to where they were almost a year ago.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
