Shares of Dollar Tree Inc. swung into the green Wednesday, as the discount retailer missed fiscal third-quarter earnings expectations because of unexpected costs associated with the recall of over-the-counter drugs.
Also providing investors with reason for optimism: The company provided an in-line sales outlook for the fourth quarter and said it was attracting more high-income customers, which could fuel growth in higher-margin discretionary product categories.
The stock
DLTR,
initially fell when the results were reported, by as much as 4% in premarket trading, before jumping into positive territory after the opening bell at 9:30 a.m. Eastern time. The stock was rising 2.4% in midday trading, to put it on track for the highest close since Aug. 31.
Net income for the quarter to Oct. 28 fell to $212.0 million, or 97 cents a share, from $266.9 million, or $1.20 a share, in the same period a year ago. The results included a 5-cent negative impact from the over-the-counter drug recall announced in May by the company’s Family Dollar business.
The FactSet consensus for earnings per share was $1.01.
Total revenue grew 5.4% to $7.31 billion, below the FactSet consensus of $7.40 billion.
Same-store sales, or sales from stores open at least a year, increased 3.9% to miss expectations of 5.3% growth, as a 4.7% rise in traffic was offset by a 0.8% decline in the average ticket, meaning the value of the average transaction.
Same-store sales from Dollar Tree-branded stores grew 5.4%, just below expectations of a 5.7% rise, as traffic increased 7.0% while the average ticket fell 1.5%.
The company said Dollar Tree had added 4.3 million new customers over the past 12 months.
“Most of our new customers over the past year have household incomes over $125,000, and this income demographic was a significant contributor to Dollar Tree’s quarter-three [same-store sales] growth,” said Chief Executive Rick Dreiling on the post-earnings conference call with analysts, according to an AlphaSense transcript.
Same-store sales of Family Dollar stores edged up 2.0%, as traffic increased 1.4% and the average ticket rose 0.7%, but that was well below growth expectations of 4.4%.
Dreiling said Family Dollar’s sales results underscore how lower-income households are under increasing financial stress and are directing their spending toward “needs-based” goods, as well as the negative impact of the drug recall.
“While traffic and ticket were both positive for the quarter, results did soften substantially as we move through the quarter with average ticket turning negative in October, as our customers pulled back and we realized the adverse impact of the OTC recall,” Dreiling said of Family Dollar’s sales results.
For the fourth quarter, the company expects net sales of $8.6 billion to $8.8 billion, which surrounds the FactSet consensus of $8.73 billion.
“Our current outlook takes into consideration several factors including continuing strength at the Dollar Tree banner, incremental freight savings, softer demand from low-income households, and a continuation of the shrink and sales mix headwinds we have seen throughout the year,” said Chief Financial Officer Jeff Davis.
The stock has shed 3.5% over the past three months, while Consumer Staples Select Sector SPDR ETF
XLP
lost 4.1% and the S&P 500
SPX,
has gained 1.4%.
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