It's also notable that the stock had been in rally mode heading into the print this morning, climbing by 14% since it last reported earnings on May 31. So, investors seem to have been anticipating an improved quarterly report from Q1, when the company missed on both the top and bottom lines. Although the Q2 results were not that bad overall, its clear investors were hoping for a more significant improvement from last quarter.
In terms of Q2 earnings, EPS actually jumped by a solid 17% year/year. This is despite the fact that gross margin slipped by 70 basis points to 30.1% as higher freight, shrink, and distribution costs applied some pressure. That said, the jump in earnings growth was actually attributable to the lowered tax rate (18.9% from 32.0%), due to the Tax Cut and Jobs Act.
Looking at the top-line, revenue increased by 4.6% to $5.53 bln with Dollar Tree banner same store sales up 3.7%. The 4.6% mark was its lightest revenue growth since 2Q17, while same store sales was its weakest in the last four quarters as well. Again, it's not as if business is falling off a cliff here. The 3.7% comp comes on top of last year's 3.9% increase, and, is the company's fifth consecutive quarter of growth above 3.5%.
Turning to its outlook, DLTR issued inline guidance for Q3, forecasting EPS of $1.11-$1.18 versus the $1.16 consensus, and revenue of $5.53-$5.64 versus the $5.58 bln estimate. That's pretty much a non-story but its FY19 guidance is more interesting. Specifically, it narrowed its EPS outlook to $4.85-$5.05 from $4.80-$5.10.
In its Q1 report, it guided for EPS of $5.32-$5.62, excluding $0.52/share in costs from Q1 debt refinancing. Considering that guidance, the consensus sat at $5.54 heading into this morning's report. So, on the surface, the $4.85-$5.05 looked like a pretty big miss. However, the $4.85-$5.05 seems to include the aforementioned $0.52 in debt reduction costs. If this is excluded, as it was in the Q1 earnings report, then its FY19 EPS guidance would be $5.37-$5.57, in-line with consensus.
There may be some confusion, then, regarding this guidance. DLTR probably should have included in its Q2 press release this morning that its original FY19 guidance was excluding those costs, while its guidance this morning was including them.
To conclude, DLTR's results perhaps didn't show the meaningful improvement from Q1 that investors were hoping for, but, they also weren't as weak as the stock's performance today is suggesting, in our opinion. Therefore, it seems possible that some confusion regarding its earnings outlook for FY19 may be partly to blame.