Dollar General And Dollar Tree Diverge Following Earnings

Discount stores Dollar Tree NASDAQ: DLTR and Dollar General NYSE: DG both reported strong first-quarter results early Thursday, but results were met quite differently.

Mid-session Thursday, Dollar Tree shares were down $7.60, or 6.93%, to $100.97.

Dollar General rose $6.37, or 3.19%, to $206.22. 

Both retailers are large-caps, and components of the S&P 500  

Virginia-based Dollar Tree, with a market capitalization of $23.44 billion, reported first-quarter earnings of $1.60 per share, topping estimates of $1.40 per share. That marked a year-over-year increase of 26%. 

Revenue came in at $6.479 billion, a gain of 3% over the year-ago quarter. Wall Street had pegged revenue at $6.42 billion, so that was also a beat.

Drilling down, the operating metrics were also solid. 

Operating income in the quarter grew 42.1% to $519.9 million, compared with $365.9 million in the year-earlier quarter. Operating income margin was 8%, compared to 5.8% last year. The first quarter of 2021 included total incremental operating costs of $7.4 million for Covid-19-related expenses, significantly down from the $73.2 million spent in the first quarter of 2020.

However, the outlook failed to please investors.

For full-year fiscal 2021, Dollar Tree estimates diluted earnings per share will range between $5.80 and $6.05. That’s below analysts’ consensus estimates. 

“This estimate assumes a consolidated comparable store net sales increase in the low single digits,” the company said in its earnings release.

It went on to cite a problem other companies have mentioned in their reports recently.

The company said, “Freight costs in the last three quarters of fiscal 2021 are projected to be $0.70 to $0.80 higher than the comparable period in fiscal 2020, expressed in terms of the impact on diluted earnings per share. The current freight cost projection is significantly higher than it was a quarter ago. However, the disruption in shipping is not expected to be permanent.”

That sent investors scurrying away from Dollar Tree.

Even before Thursday’s retreat, Dollar Tree shares were pulling back from an April 6 high of $120.37. 

The stock had broken out of a double bottom pattern on March 6, but lost momentum and were already trading below the previous $111.94 buy point before Thursday.

Meanwhile, Tennessee-based Dollar General gapped up at the open and was holding onto those gains following its report. 

Earnings came in at $2.82 per share, a 10% year-over-year gain. That topped estimates of $2.14 per share. Revenue was $8.4 billion, down 1% year-over-year, but still ahead of views.

Dollar General, whose market capitalization is $49.13 billion, has been consolidating recently, below a November high of $225.25. It hit resistance at $222 on May 10 before retreating again. Shares are down 4.54% year-to-date but up 6.04% in the past three months. 

Although net sales and same-store sales decreased, investors clearly like the company’s trajectory. 

Dollar General noted that gross profit as a percentage of net sales was 32.8% in the first quarter of 2021 compared to 30.7% in the first quarter of 2020. 

According to the company, “This gross profit rate increase was primarily attributable to higher initial markups on inventory purchases; a reduction in markdowns as a percentage of net sales; a greater proportion of sales coming from the non-consumables product categories, which generally have a higher gross profit rate than the consumables product category; and a reduction in inventory shrink as a percentage of net sales.”

Dollar General also cited increased transportation costs as a drag on returns, but issued better-than-expected updated guidance.

For the fiscal year 2021, the company now expects net sales in the range of a 1% decline to an increase of 1%; compared to its earlier guidance in the range of a 2% decline to flat sales. 

Dollar General also sees same-store sales declining 5% to 3%, compared to its previous expectation for a decline of 6% to 4%. 

It guided toward diluted earnings per share in the range of $9.50 to $10.20, above the company’s previous guidance of earnings per share between $8.80 to $9.50. Analysts expect full-year earnings of $9.63 per share. 

As the stock moved higher Thursday, trading volume was 47% higher than normal.