For 1Q20, it expects to generate EPS of $1.05-$1.15, excluding items, compared to the $1.30 consensus on revenue of $5.74-$5.85 billion vs. the $5.81 billion expectation. Lastly, it sees FY20 EPS coming in at $4.85-$5.25, well below the $5.82 consensus. However, as we explain below, this includes extraordinary costs totally $0.31/share due to its store optimization initiatives.
Despite the "mixed at best" headline numbers, shares of DLTR are trading higher this morning. The reason being, its Family Dollar banner, which has been a drag on its performance ever since it was acquired in July 2015, finally showed some signs of progress. Additionally, DLTR is planning on accelerating its store optimization plans, including closing down more under-performing Family Dollar stores and renovating many more.
First, for some background. Back in the summer of 2015, DLTR found itself in a bidding war with rival Dollar General (DG) for Family Dollar. In terms of size and store count, DLTR and DG are in very close proximity, with 14,835 and 15,227 stores respectively. But, without that acquisition, DLTR would have lagged far behind DG, so there was certainly some pressure to get that deal done.
However, the integration has not gone smoothly, to say the least. One of the most pressing issues is that Family Dollar stores are not really $1 stores, like DLTR is. While it does have an assortment of $1 items, most of the products it carries are higher than that. It also offers a variety of bulk items, like a COST does. Furthermore, it carries a higher mix of food and consumables than DLTR does. So, in essence, Family Dollar is a combination of discount, bulk, and grocery with mixed pricing points. That is distinctly different from DLTR, catering to a shopper that goes there for necessity items, while DLTR has more of a discretionary bent.
Quarter after quarter, the Dollar Tree banner has outperformed Family Dollar -- often by a wide margin. In fact, Family Dollar has been posting flat or negative comps on a consistent basis. Consequently, DLTR has faced mounting pressure from activist investor Starboard, which has been pining for the company to ditch Family Dollar. But, DLTR has not bent to the pressure and instead is looking to kick its turnaround plan into another gear.
In Q4, DLTR posted combined same store sales growth of +2.4%. What really caught investors' attention, though, is that Family Dollar posted a +1.4% mark, it's best performance of the year. To rewind, last quarter Family Dollar posted a -0.4% comp, preceded by 0.0% in Q2 and -1.1% in Q1. Meanwhile, DLTR's same store sales growth averaged 3.3% over those three quarters. In Q4, average ticket was up at Family Dollar and traffic improved by 120 basis points from Q3.
DLTR has taken a variety of steps to stabilize the Family Dollar business, including rebuilding leadership teams, developing shared infrastructure, improving store quality and standards, investing in labor, and repaying more than $4 bln in debt since the acquisition. These initiatives haven't turned the tide completely for DLTR, but, the company now believes it is at a point where it can re-position, renovate, re-banner, and optimize the Family Dollar banner. And that is what has investors feeling optimistic today.
These plans will specifically include the renovation of 1,000 Family Dollar stores, the re-branding of 200 Family Dollar stores to Dollar Tree, and the closing of as many as 390 under-performing Family Dollars. This will require heavy investment from the company as it is planning for capex to hit about $1 bln in FY19. There will also be significant discrete, extraordinary expenses for items such as consolidation costs, store closure costs, most of which will hit in 1H19. These one-time items are expected to negatively impact FY19 EPS by about $0.31/share.
The good news, though, is as these initiatives gain traction, DLTR sees accelerated earnings into FY20, expecting EPS growth of 14-18% from FY19.
Another key factor impacting DLTR has been the tariffs on imported Chinese goods, which account for about 40-45% of Dollar Tree purchases, and 20-25% of purchases for Family Dollar. Currently, there is a 10% tariff on these goods, but, that was expected to increase to 25% on March 1. But, that increase has been delayed by the Trump administration as negotiations revolving around a new trade agreement continue. There has been plenty of hopeful commentary from the administration that a new deal could be hammered out, and, if that does indeed occur, it would be a significant positive for DLTR. On that note, its FY20 guidance is based on the assumption that tariffs are lifted to 25%.