Its report is also in stark contrast to peer Dollar General (DG), which comfortably beat analysts' Q1 expectations this morning and reaffirmed its FY20 guidance. DG's same store sales growth of +3.8% also easily outpaced DLTR's +2.2% growth.
Based on this news, one would assume that DLTR would be trading sharply lower this morning.
However, the stock had been notably weak heading into its report, dropping by nearly 15% since the end of April. Therefore, it appears that some of the bad news was already priced into the stock.
Investors may also be viewing this as a "kitchen sink" quarter that represents the worst of its escalating costs.
And, perhaps most importantly, the improving results at its Family Dollar stores are helping to remove a significant overhang on the stock as investors begin to feel more optimistic about the turnaround there.
For the quarter, the company posted EPS of $1.14, in-line with the consensus, with revenue increasing 4.6% yr/yr to $5.81 bln, slightly edging out the $5.78 bln expectation.
Its enterprise same store sales (inclusive of both Dollar Tree and Family Dollar banners) growth of +2.2% is a deceleration from recent performance.
Last quarter, DLTR posted combined same store sales growth of +2.4% after averaging about +3.3% over the prior three quarters.
The good news, though, is that Family Dollar has now generated back-to-back positive comps of +1.9% and +1.4% in Q1 and Q4, respectively. Ever since DLTR acquired Family Dollar in July 2015, the segment has been a drag on the company’s financials and growth, oftentimes posting negative comps.
There are a few reasons why the integration has been so challenging, including differing pricing models and product assortments and the general poor condition of some Family Dollar stores in the chain.
Over the past several quarters, DLTR has taken steps to turn the Family Dollar business around.
Renovating stores is a major piece of that puzzle, as it plans to remodel 1,000 stores this year. Additionally, DLTR is closing under-performing stores, investing in labor, and developing shared infrastructure.
It has been a slow and tedious process, but it now appears that these initiatives are paying dividends.
DLTR isn't satisfied yet, though, as it is set to ramp up its turnaround efforts.
In its Q4 report, the company stated that its FY20 EPS guidance ($4.85-$5.82) included $95 mln in costs related to its store optimization plan. This quarter, it tacked on another $30 mln of costs associated with additional store closings, as well as $15 mln from higher freight costs.
As a result, it lowered its EPS guidance to $4.77-$5.07 but maintained its same store sales guidance of low single-digit growth.
Key Takeaways: DLTR's Q1 results and its guidance aren't overly impressive, yet the stock is trading higher by nearly 5% anyway.
In our view, the main reason for its surprising strength this morning is that investors are feeling more optimistic about the turnaround at Family Dollar.
The back-to-back positive comps at Family Dollar indicate that its turnaround plan is working. If DLTR can successfully right the ship at the previously struggling Family Dollar chain, that would remove a long-standing concern and overhang on the stock.
Therefore, investors are willing to stomach some near-term pain in the form of higher costs in exchange for a long-term fix at Family Dollar.