Dollar Tree (NASDAQ:DLTR) Q2: Beats On Revenue But Stock Drops

Anthony Lee /
2023/08/24 6:57 am EDT

Discount treasure-hunt retailer Dollar Tree (NASDAQ:DLTR) reported Q2 FY2023 results topping analysts' expectations, with revenue up 8.23% year on year to $7.33 billion. The company also lifted its full-year revenue guidance and expects next quarter's revenue to be around $7.4 billion, in line with analysts' estimates. Dollar Tree made a GAAP profit of $200.4 million, down from its profit of $359.9 million in the same quarter last year.

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Dollar Tree (DLTR) Q2 FY2023 Highlights:

  • Revenue: $7.33 billion vs analyst estimates of $7.21 billion (1.67% beat)
  • EPS: $0.91 vs analyst estimates of $0.86 (5.4% beat)
  • Revenue Guidance for Q3 2023 is $7.4 billion at the midpoint, above analyst estimates of $7.33 billion
  • The company lifted revenue guidance for the full year from $30.3 billion to $30.8 billion at the midpoint, a 1.65% increase
  • Free Cash Flow was -$254 million, up from -$294 million in the same quarter last year
  • Gross Margin (GAAP): 29.2%, down from 31.4% in the same quarter last year
  • Same-Store Sales were up 6.9% year on year
  • Store Locations: 16,476 at quarter end, increasing by 245 over the last 12 months

“At our June Investor Conference we shared the details of our strategy to transform the company and unlock the true value of our business, and our second quarter results show us making solid progress against these objectives. Both the Dollar Tree and Family Dollar segments reported strong same-store sales trends, driven by increased traffic and accelerated market share gains,” said Rick Dreiling, Chairman and Chief Executive Officer.

A treasure hunt because there’s no guarantee of consistent product selection, Dollar Tree (NASDAQ:DLTR) is a discount retailer that sells general merchandise and select packaged food at extremely low prices.

Traditional grocery stores are go-tos for many families, but discount grocers serve those who may not have a traditional grocery store nearby or who may have different spending thresholds. Certain rural or lower-income areas simply don’t have a grocery store. Additionally, some lower-income families would prefer to buy in smaller quantities than available at most stores (think one or two paper towel rolls at a time). While online competition threatens all of retail, grocery is one of the least penetrated because of the nature of buying food. Furthermore, those buying small quantities for immediate need are even less likely to leverage e-commerce for these purposes.

Sales Growth

Dollar Tree is one of the larger companies in the consumer retail industry and benefits from economies of scale, enabling it to gain more leverage on fixed costs and offer consumers lower prices.

As you can see below, the company's annualized revenue growth rate of 5.91% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre as it opened new stores and grew sales at existing, established stores.

Dollar Tree Total Revenue

This quarter, Dollar Tree reported solid year-on-year revenue growth of 8.23% and its revenue of $7.33 billion outperformed analysts' estimates by 1.67%. The company is guiding for revenue to rise 6.63% year on year to $7.4 billion next quarter, slowing from the 8.14% year-on-year increase it had recorded in the same quarter last year. Looking ahead, the analysts covering the company expect sales to grow 6.81% over the next 12 months.

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Number of Stores

A retailer's store count is a crucial factor influencing how much it can sell, and store growth is a critical driver of how quickly its sales can grow.

When a retailer like Dollar Tree keeps its store footprint steady, it usually means that demand is stable and it's focused on improving its operational efficiency to increase profitability. Dollar Tree's store count increased by 245 locations, or 1.51%, over the last 12 months to 16,476 total retail locations in the most recently reported quarter.

Dollar Tree Operating Retail Locations

Over the last two years, the company has only opened a few new stores and averaged 2.05% annual growth in new locations. This sluggish pace is lags the broader sector. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Same-Store Sales

Same-store sales growth is a key performance indicator used to measure organic growth and demand for retailers.

Dollar Tree's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 4.88% year on year. Given its flat store count over the same period, this performance could stem from increased foot traffic at existing stores or higher e-commerce sales as the company shifts demand from in-store to online.

Dollar Tree Year On Year Same Store Sales Growth

In the latest quarter, Dollar Tree's same-store sales rose 6.9% year on year. This growth was an acceleration from the 4.9% year-on-year increase it had posted 12 months ago, which is always an encouraging sign.

Key Takeaways from Dollar Tree's Q2 Results

With a market capitalization of $31.3 billion, a $512.7 million cash balance, and positive free cash flow over the last 12 months, we're confident that Dollar Tree has the resources needed to pursue a high-growth business strategy.

It was encouraging to see Dollar Tree lift its full-year revenue guidance and top analysts' revenue expectations this quarter, driven by strong same-store sales growth. That really stood out as a positive in these results. On the other hand, its operating margin was much lower than expected. This drop likely shocked investors. Overall, this was a mixed quarter for Dollar Tree. The company is down 5.81% on the results and currently trades at $134 per share.

So should you invest in Dollar Tree right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.