Dollar Tree shares soar, as discount stores show strength

In an otherwise dismal start to the year for the retail industry, dollar-store chains are showing their strength.

Dollar Tree and Dollar General both reported better-than-expected first-quarter earnings Thursday, sending their shares soaring nearly 14 percent and 6 percent, respectively.

Nearly 11 months after buying Matthews-based Family Dollar, Dollar Tree said the combined company is off to a “successful start” to 2016. In a statement, the company’s CEO Bob Sasser also said he considers dollar stores “the most attractive sector” in retail.

The discount chain said first-quarter revenue rose nearly 134 percent from the same period a year ago thanks to sales from Family Dollar stores and newly opened Dollar Tree stores. Still, as has been the case in the past, Dollar Tree said margins decreased because of the less-profitable product mix at Family Dollar stores.

“We remain on schedule with our integration of Family Dollar; we are on track to achieve our stated synergy targets; and we are part of what I consider, in this economic environment, the most attractive sector in retail,” CEO Bob Sasser said in a statement.

Meanwhile, other retailers like department stores, beset by competition from e-commerce and changing customer habits, recently kicked off their first-quarter earnings seasons with a thud. Macy’s, for example, reported its worst quarterly sales since the recession.

Dollar Tree, based in Virginia, completed its $9.1 billion purchase of Family Dollar last July. One of the ways Dollar Tree has worked to make the combined company more profitable has been to re-banner underperforming Family Dollar stores as Dollar Trees.

For the quarter, Dollar Tree said it opened three former Family Dollar store locations as new Dollar Tree stores. The company converted 126 Deals stores, another one of its brands, into Dollar Tree stores and converted nine Deals stores to Family Dollar stores.

In a call with analysts, Sasser added that as part of the integration, Family Dollar stores are cleaner, their shelves are better stocked and old inventory has been cleaned up.

For the quarter, Dollar Tree reported better-than-expected earnings, but sales fell short of expectations.

Net income was $232.7 million, up from $69.5 million in the first quarter of 2015, the company said. Excluding a one-time tax benefit and acquisition-related costs, earnings for the quarter totaled 89 cents a share, beating Wall Street estimates by 8 cents.

The company reported sales of $5.09 billion for the quarter, up from $2.18 billion from the same period a year prior but still $10 million below the consensus estimate from Wall Street analysts. Same-store sales – sales at stores open for at least one year, a key metric for investors – rose 3.4 percent over the year.

As a percent of sales, Dollar Tree said gross margin fell to 30.6 percent compared to 34.4 percent in the prior year. A big reason for the decrease, the company said, was the impact of the overall lower-margin product mix for the Family Dollar business.

In the past, Family Dollar added more low-margin consumable goods, such as food, and sold fewer high-margin discretionary goods, like clothes.

Dollar Tree operated 13,997 stores in North America as of April 30, making it the largest dollar-store chain by store count.

This story was originally published May 26, 2016 at 9:17 AM with the headline "Dollar Tree shares soar, as discount stores show strength."