Dollar Tree, Inc. (NYSE:DLTR) has released its second-quarter fiscal 2023 results, showcasing an impressive beat on both earnings and sales, surpassing the Consensus Estimate. The company’s top line demonstrated year-over-year improvement, even as earnings experienced a decline. These results were primarily driven by growth across its segments, heightened foot traffic, and robust market share gains. This success has prompted the management to revise its fiscal 2023 top-line outlook.

However, on August 24, the pre-market trading session witnessed a decline of over 6% in DLTR shares, possibly attributed to subdued consumer spending trends. Despite this, the stock had registered a 4.1% gain in the past three months, slightly below the industry’s growth of 6.5%.

Detailed Quarterly Performance

Dollar Tree’s earnings underwent a 43% year-over-year dip, settling at 91 cents per share. Nonetheless, this figure surpassed the Consensus Estimate of 88 cents.

Consolidated net sales demonstrated an 8.2% annual rise, amounting to $7,325 million, comfortably outperforming the Consensus Estimate of $7,222 million. Notably, the company’s enterprise same-store sales (comps) marked a solid 6.9% year-over-year improvement. Analyzing the performance of its banners, Dollar Tree experienced a 7.8% rise in comps, whereas Family Dollar banner witnessed a 5.8% uptick.

Enterprise comps exceeded our initial estimation of 4.8% growth. Our earlier prediction suggested a 4.9% growth for the Dollar Tree banner and a 4.8% growth for Family Dollar.

Dollar Tree segment’s performance was buoyed by a 9.6% rise in foot traffic, partially offset by a 1.6% decline in average ticket. Meanwhile, Family Dollar observed a 3.4% increase in traffic and a 2.3% boost in average ticket.

The gross profit noted a marginal 0.5% YoY growth to reach $2,134.7 million, although the gross margin contracted by 220 basis points (bps) to 29.2%. Our forecast had anticipated a 1% rise in gross profit and a 140 bps decline in gross margin. Various factors like lower initial mark-on, unfavorable sales mix, shrink, wage investments in distribution center payroll, and elevated general liability insurance claims contributed to this margin contraction. However, lower freight costs did provide some relief. The contraction in gross margin was further exacerbated by a substantial margin gain in the preceding quarter due to Dollar Tree’s transition to the $1.25 price point. The Dollar Tree banner witnessed a 400 bps decline in gross margin, settling at 33.4%, while the Family Dollar segment saw a 30 bps contraction, resulting in a 24.4% gross margin.

In terms of selling, general and administrative (SG&A) expenses as a percentage of sales, a 130 bps increase to 25.3% was observed, differing from our forecast of a 200 bps expansion. The escalation was largely attributed to wage investments in store and field payroll, higher incentive compensation, investments in repairs and maintenance, augmented professional fees, elevated general liability insurance claims, and increased utilities expenses. This escalation was slightly counterbalanced by comparable store net sales leverage.

Operating income plummeted by 43.1%, amounting to $287.8 million, with the operating margin contracting by 360 bps to 3.9%. Our prediction had expected an operating income surge of 43% and a 350 bps decline in operating margin. Specifically, the Dollar Tree segment’s operating margin contracted by 510 bps to 10.3%, while the Family Dollar segment experienced an adjusted operating income decline of 78.5% year over year, settling at $11.8 million.

Financial Standing

As of the close of the fiscal second quarter, Dollar Tree reported cash and cash equivalents of $512.7 million. During the same period, net merchandise inventories dropped from $5,422.2 million in the prior-year period to $5,329.4 million. Additionally, the company carried a net long-term debt of $3,423.9 million and shareholders’ equity amounting to $9,031 million.

Notably, the company repurchased 703,713 shares for $99.9 million during the second quarter of fiscal 2023. As of Jul 29, 2023, Dollar Tree still holds a remaining authorization of $1.6 billion for share repurchases.

Store Updates

In the second quarter of fiscal 2023, Dollar Tree inaugurated 48 new stores and re-bannered two stores. Meanwhile, it launched 70 Family Dollar stores. However, the company also closed 26 Dollar Tree stores and 37 Family Dollar stores in the same period. Additionally, 276 Family Dollar store renovation projects were successfully completed. At the end of the quarter, Dollar Tree boasted a total of 16,476 stores in 48 states and five Canadian provinces.

Guidance

For the fiscal year 2023, Dollar Tree anticipates consolidated net sales ranging between $30.6 billion and $30.9 billion, a notable revision from its earlier guidance of $30 billion to $30.5 billion. According to our estimate, sales are projected to reach $30.1 billion. The company expects mid-single-digit comps growth, surpassing its prior guidance of low to mid-single-digit growth and our estimate of 4.4% growth. This growth is projected to be distributed across both the Dollar Tree and Family Dollar segments. Previously, the expectation was set at low to mid-single-digit growth for Dollar Tree and mid-single-digit growth for the Family Dollar segment.

Selling square footage is predicted to grow by 3-3.5% for fiscal 2023, with the majority of new store openings anticipated in the latter part of the year.

The management has set its sights on earnings per share (EPS) ranging from $5.78 to $6.08 for fiscal 2023, a forecast that includes a 12-cent contribution from the 53rd week and a 12-cent charge for the legal reserve. This is aligned with our estimate of $5.92.

As for the third quarter of fiscal 2023, Dollar Tree’s projections include consolidated net sales between $7.3 billion and $7.5 billion, underpinned by mid-single-digit comps growth. According to our estimate, net sales will likely reach $7.3 million, accompanied by a comps growth rate of 3.7%. Furthermore, the company foresees mid-single-digit growth in comps for both the Dollar Tree and Family Dollar segments. EPS for the fiscal third quarter is estimated to fall within the range of 94 cents to $1.04, a projection that contrasts with our estimate of $1.18.

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