Dollar Tree, Inc. Only Bright Spot Among Dismal U.S. Retailers
Could U.S. retail sales have been any more disappointing? U.S. October retail sales inched up 0.1%, significantly below the underwhelming 0.3% analysts were expecting. Not surprisingly, kneejerk investors sent retail stocks reeling across the board. Had they taken the time to read the Census Bureau’s release, they would have seen that Dollar Tree, Inc. (NASDAQ:DLTR) is an excellent retail stock. Among all of the retail stocks out there, DLTR stock could be the most interesting play there is.
U.S. Retail Sales Undermine Labor Market Data
On paper, the U.S. economy looks like it’s running at full steam. Unemployment is down to five percent, there are signs of wage growth, and the global economy, save for South America, seems to be on the mend.
But the fact of the matter is that the numbers just don’t add up. Unemployment may be down but most of the growth is among part-time, low-paying jobs. How do I know? A friend of mine has four of them and he hasn’t seen a raise in years—at any of his jobs.
For months and months here at Profit Confidential, we’ve been saying that the underlying economic data does not support the hawkish tone of the Federal Reserve or the bullish nature of the stock market.
I enter as evidence, of the 463 S&P 500 companies that have reported earnings to date, blended earnings decline is -1.8%. If the index reports a decline in earnings for the third quarter, it will mark the first back-to-back quarters of earnings declines since 2009. (Source: “FactSet Earnings Insight,” FactSet.com, November 11, 2015.)
Chart courtesy of www.StockCharts.com
The blended revenue decline for the third quarter fell four percent. If the S&P 500 marks a decline in the third quarter, it will be the third consecutive quarter of revenue declines for the S&P 500. Charming.
And if the index reports a year-over-year decline in revenues for the fourth quarter, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in revenues since the fourth quarter of 2008 through the third quarter of 2009.
But it gets worse. For the fourth quarter of 2015, the estimated earnings decline is -3.6%, while the estimated revenue decline is -3.1%. If the S&P 500 reports a year-over-year decline in earnings for the fourth quarter, it will mark the first time the index has seen three consecutive quarters of year-over-year declines in earnings since the first quarter of 2009 through the third quarter of 2009.
If the U.S. labor market is doing so well, why is corporate America stuck with weak earnings and revenue growth?
Underwhelming Retail Stocks Getting Hammered
Everyone knows the U.S. gets roughly three-quarters of its gross domestic product (GDP) from consumer spending. But if Americans can’t find good jobs with upward mobility, they cannot make money, get ahead, and propel the U.S. economy forward.
Heck, after almost a decade and more than $3.0 trillion, the Federal Reserve and its overly generous quantitative easing measures was unable to kick-start the world’s biggest economy. So how can average Americans be expected to keep the country going?
They can’t and we’re seeing it in the data.
On Friday, November 11, the Census Bureau announced dismal retail numbers. October retail sales advanced a princely 0.1% month-over-month, well below the 0.3% caviar-eating analysts predicted. (Source: “Advance Monthly Sales For Retail and Food Services October 2015,” Census Bureau, November 11, 2015.)
But the devil is in the details. Sales decreased at service stations and electronics stores, but they held steady at clothing stores and increased at furniture stores, restaurants, and online merchants.
Still, the bad news sent investors into a tizzy. Selling everything under the blue light special, whether it deserved to be kicked to the ground or not.
Admittedly, many retail stocks deserve a kick over the edge. Nordstrom, Inc. (NYSE:JWN) missed on earnings and provided a weak forecast and was rewarded with a tanking share price. Fossil Group, Inc. (NYSE:FOSL) enjoyed tapping a 52-week low after reporting disappointing revenue and a weak outlook. JCPenny shares fell after reporting a 3.6% decline in comparable store sales, Overstock.com, Inc. (NASDAQ:OSTK) is at a 52-week low after reporting its first loss in 15 quarters, and retail juggernaut Wal-Mart Stores, Inc. (NYSE:WMT) warned it expects to report weaker earnings over the next two years, as the company tries to lure more people into its fluorescent labyrinths.
Perhaps not surprisingly, retail sector exchange-traded funds (ETFs) are bearing the brunt of the weak data and outlook. The SPDR S&P Retail ETF (NYSEArca:XRT) is at its lowest level in more than a year and down 4.5% since January. Meanwhile, the PowerShares Dynamic Retail ETF (NYSEArca:PMR) is down approximately 6.5% year-to-date.
Did Irrational Investors Just Kick Dollar Tree off a Cliff?
Then there’s Dollar Tree. It, too, suffered the brunt of disgruntled investors, closing down 6.55% on Friday at $62.21. This also represents an eye-watering 12.30% depreciation year-to-date.
But was the purge justified?
On September 1, North America’s leading operator of discount variety stores delivered its 30th consecutive quarter of positive same-store sales, completed the acquisition of Family Dollar, and initiated its integration plan. (Source: “Dollar Tree, Inc. Reports Results for the Second Quarter Fiscal 2015,” Dollar Trees, Inc., September 1, 2015.)
Second-quarter net sales increased 48.3% to $3.01 billion. The increase was the result of $811.6 million in sales from the Family Dollar segment since closing on the acquisition and a same-store sales increase of 2.7% on a constant currency basis for the Dollar Tree segment.
Net income, including acquisition-related costs, decreased $219.5 million compared to the prior year’s second quarter, resulting in a net loss of $(0.46) per diluted share. Excluding acquisition-related adjustments, net income decreased $72.6 million to $53.5 million and diluted earnings per share decreased 59% to $0.25.
During the quarter, Dollar Tree acquired 8,284 Family Dollar Stores, Inc. (NYSE:FDO), opened 141 stores, expanded or relocated 40 stores, and closed one store. As part of its re-banner initiative, the company closed 18 Family Dollar stores; four have re-opened as Dollar Tree stores and the other 14 re-opened as Dollar Tree stores following quarter-end. Retail selling square footage at the end of the quarter was approximately 108.2 million square feet.
Going forward, Dollar Tree estimates consolidated net sales for the third quarter of 2015 to range from $4.78 billion to $4.87 billion, based on a low single-digit increase in same-store sales. For the full year, the company estimates consolidated net sales to range from $15.30 billion to $15.52 billion, based on a low single-digit increase in same-store sales.
On November 2, Dollar Tree announced it completed the divesture of 330 Family Dollar stores to Dollar Express LLC (a portfolio company of Sycamore Partners, a private equity firm). (Source: “Dollar Tree Completes Divestiture of 330 Family Dollar Stores to Dollar Express,” Dollar Tree, Inc., November 2, 2015.)
Investors may be scared off by the net loss, but sometimes, as is with acquisitions, you have to break the arm to reset it. It’s all for a good cause and with dismal retail numbers, you can expect more and more average Americans to be visiting discount retailers like Dollar Tree.
Here’s the Bottom Line on DLTR Stock
In fact, before October retail numbers were released, Dollar Tree actually broke through its 50-day moving average in a bullish manner. One analyst re-initiated coverage on the company with a price target of $90.00, noting that the company’s fundamentals will not change overnight in regards to the acquisition of Family Dollar Stores. It will take time to deliver expected synergies with margins projected to expand at four percent in 2018.
When it comes to long-term retail stocks, DLTR stock is one of the most compelling names out there.