Discount Non-Food Retail Chain Dollar Tree, Inc. (NASDAQ: DLTR) reported its financial results for its third quarter ended October 31, 2020. Dollar Tree, a Fortune 200 Company, operated 15,606 stores across 48 states and five Canadian provinces. Stores operate under the brands of Dollar Tree, Family Dollar, and Dollar Tree Canada.
"I am incredibly proud of our team’s efforts to continue serving customers effectively, while driving operational improvements in both banners through this dynamic retail environment,” stated Mike Witynski, President and CEO. “Dollar Tree delivered its strongest same-store sales performance in the past ten quarters, along with a 50 basis point improvement in operating margin. At Family Dollar, the improvement continues as the team delivered a 6.4% comparable store sales increase, a 230 basis point improvement in gross profit margin and a 250 basis point improvement in operating margin.”
Third Quarter Results Consolidated net sales increased 7.5% to US$6.18 billion from US$5.75 billion in the prior year’s third quarter. Enterprise same-store sales increased 5.1%. LFL sales for Family Dollar increased 6.4%. Dollar Tree same-store sales increased 4.0%. Gross profit increased 12.9% to $1.92 billion in the quarter compared to the prior year’s third quarter. Gross margin increased 150 basis points to 31.2%, compared to 29.7% in the prior year’s quarter. The increase in gross margin was driven by improved merchandise costs including freight, leverage on occupancy costs from stronger same-store sales, improved shrink results and reduced markdowns, partially offset by higher distribution costs, which included US$10.9 million in COVID-19-related payroll costs. Selling, general and administrative expenses were 23.7% of net sales, compared to 23.5% of net sales in the prior year's third quarter. The increase was driven by COVID-19 costs of US$35.3 million, or 57 basis points, related to frontline associate wage premiums, field management bonuses and store cleaning/PPE supplies. Operating income for the quarter improved 29.9% to US$465.5 million, compared with US$358.4 million in the same period last year and operating income margin was 7.5% in the current quarter, compared to 6.2% in last year’s quarter.
The third quarter of 2020 included total incremental operating costs of US$46.3 million, or US$0.15 per diluted share, for COVID-19-related expenses. These incremental costs by segment were US$28.6 million for Dollar Tree, $17.4 million for Family Dollar and $0.3 million for Corporate, Support and Other. Net income was US$330.0 million in the third quarter and diluted earnings per share for the quarter increased 28.7% to US$1.39, compared to $1.08 per share in the prior year’s quarter. The Company repurchased 2,154,304 shares during the quarter for US$200 million. The Company has US$600 million remaining on its share repurchase authorization. The Company opened 143 new stores, expanded or relocated 34 stores, and closed 16 stores. Additionally, the Company completed 371 renovations to the Family Dollar H2 format. Retail selling square footage at quarter end was approximately 124.3 million square feet.
First Nine Months Results Consolidated net sales increased 8.4% to US$18.74 billion from US$17.30 billion in the same period last year. Enterprise same-store sales increased 6.5% on a constant currency basis (or 6.4% when adjusted to include the impact of Canadian currency fluctuations.), when compared to the prior year period. Same-store sales for Family Dollar increased 11.2%. Dollar Tree same-store sales increased 2.1%. Gross profit for the first nine months increased 10.9% to US$5.64 billion. As a percentage of net sales, gross margin improved 70 basis points to 30.1%, compared to 29.4% in the prior year period. The current year includes US$28.7 million, or 0.2% of net sales, in COVID-19 costs. Selling, general and administrative expenses were 23.7% of net sales, compared to 23.5% of net sales in the first nine months of 2019. The current year includes US$225.6 million, or 1.2% of net sales, in COVID-19 costs. Operating income for the period improved 19.1% to US$1.21 billion. Operating income margin increased 50 basis points to 6.4% of net sales in the current year period from 5.9% of net sales in the prior year. The first nine months of 2020 included incremental operating costs of US$254.3 million, or US$0.82 per diluted share, for COVID-19-related expenses, which included wage premiums paid to hourly store and distribution center associates, and safety and sanitization supplies.
These incremental costs by segment were $147.4 million for Dollar Tree, US$104.9 million for Family Dollar and $2.0 million for Corporate, Support and Other. Net income compared to the prior year period improved 19.2% to $839.1 million and diluted earnings per share increased 19.7% to $3.53 compared to $2.95 in the prior year period.
Leveraging the Power of Both Brands
The combination of Dollar Tree and Family Dollar provides the Company more opportunities to better serve more customers in more ways, and in more locations across the country. In recent years, the Company has made significant progress in optimizing its portfolio of stores through new store openings, renovations, re-banners and closings. The H2 renovation program at Family Dollar continues to be a key component of the momentum in the turnaround. The H2 stores, on average, continue to comp at a 10%+ lift vs. non-renovated stores in their first year. Customers are responding favorably to the new categories and new price points. Sell through on seasonal items has been exceptional. There is continued opportunity to renovate older Family Dollar stores.
As of October 31, 2020, the Company has approximately 2,240 Family Dollar stores in the H2 format. The Company currently plans to renovate approximately 1,250 Family Dollar stores in 2021. Additionally, for more than a year, Dollar Tree has tested a multi-price initiative referred to as Dollar Tree Plus! In mid-2019, the Company began testing multi-price assortments in more than 100 stores in southwestern markets. Major modifications, based on learnings, have included: transitioning the offering from consumable products to primarily discretionary items; reengineering the display elements and signage to drive awareness and excitement in stores; focusing on the US$1, US$3 and US$5 price points; and increasing the offerings above the US$1 price point. The Company will be expanding this initiative into a total of approximately 500 stores beginning in the spring of 2021.
Since acquiring Family Dollar, the Company has produced strong cash flow from operations, paid down debt aggressively, repurchased US$400 million in shares, mitigated the majority of impacts from tariffs proactively, consolidated its two store support centers and realigned leadership under one executive team. These actions enhance the Company’s ability and flexibility to better leverage the two powerful brands to drive improved productivity, efficiencies and returns. “The team has accomplished a great deal to get us to this stage. With one consolidated store support center; a strong balance sheet; an aligned, energized and focused leadership team; and a full staff of talented retailers, we believe we have the ability to better serve customers across North America,” Witynski added. “We have a unique and transformational opportunity to leverage the power of our two brands, through flexible store formats designed to drive improved operational performance.” Update on Company Outlook, Initiatives and Liquidity Due to continued volatility and uncertainty related to the COVID-19 pandemic, as well as a lack of visibility into government stimulus initiatives, the Company is not providing updated guidance at this time. The Company now expects the completion of approximately 480 new store openings and 750 Family Dollar H2 store renovations in fiscal 2020. Capital expenditures for fiscal 2020 are expected to be approximately US$1.0 billion. The Company ended the quarter with US$1.12 billion in cash on its balance sheet. The Company paid down the remaining US$500 million on its revolving line of credit during the third quarter. Additionally, the Company plans to pay off a $300 million legacy Family Dollar note due in February 2021. “It’s an exciting time at Dollar Tree. We are just over three weeks into our important fourth quarter and we are off to a very good start, with same-store sales at both banners currently tracking above reported third quarter levels.
Our focus will continue to be on opening new stores, refining our store formats and upgrading our assortments to drive improved store productivity, increasing operating efficiencies, generating free cash flow and buying back shares,” Witynski concluded. “These efforts are designed to deliver continued value to our long-term shareholders.”
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