Shares of discount retailer Dollar Tree Inc. (DLTR, Financial) rallied on Thursday morning to $98 after the company announced its first-quarter results. Shares of the company gained more than 11% after beating analysts' expectations for revenue and earnings.
Dollar Tree is one of the retail companies that saw a significant increase in revenue toward the end of the quarter as consumers rushed to stockpile goods amid the coronavirus pandemic. The company is looking to see a much improved top line in the second quarter. This appears to be the reason behind today’s sharp rise in the stock price.
Highlights from the most recent quarter
Dollar Tree reported earnings of $1.04 per share, which was above the analyst estimate of 91 cents. This reflected an 8.8% decline from the same period last year. The company’s net sales of $6.286 billion were also higher than the expected revenue of $6.184 billion.
Same-store sales grew 7% on a year-over-year basis amid a 15.5% increase in Family Dollar store sales against a 0.9% decline in Dollar Tree store sales. Dollar Tree’s focus on non-staple categories resulted in slow sales after consumers changed shopping behaviors during the Easter holiday due to the Covid-19 virus. "The seasonal and discretionary business was materially impacted by lower Easter holiday sales," CEO Mike Witynski said in the company’s earnings press release.
The company’s sales mix for the quarter leaned toward low-margin products, which squeezed the overall gross margin to 28.5% from 29.7% in the same period last year.
The company also reported $73.2 million in incremental operating expenses due to the virus, which contributed to low operating income of $365.9 million, which was down from $385.5 million a year ago. Dollar Tree’s operating income also suffered from an incremental tariff of $23 million from last year.
Valuation
Shares of Dollar Tree are currently valued at a price-earnings ratio of 28.04. This is close to its competitor Dollar General Corp.’s (DG, Financial) price-earnings ratio of 27.89, whose stock fell 1.14% on Thursday. However, when the five-year expected earnings growth is factored in, Dollar Tree appears more appealing with a PEG ratio of 1.90 compared to Dollar General’s equivalent of 2.24.
Walmart Inc. (WMT, Financial) trades at a more attractive earnings multiple of 23.55, but its limited growth potential over the next five years makes it look more expensive with a PEG ratio of 4.17. Overall, Dollar Tree looks like an appealing option for those targeting long-term growth.
Conclusion
Overall, investors appear to have reacted positively to Dollar Tree’s latest earnings report. This comes despite some mixed outcomes in the revenue mix. Management remains optimistic about the second quarter, which will be highly affected by Covid-19. Regardless, it remains to be seen how this will impact the stock price given today’s sharp rise.
Disclosure: No positions in the stocks mentioned.
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