Labor, Tariff Costs Pressure Dollar Tree Q4
The white hot labor market put increased pressure on Dollar Tree earnings over the holiday quarter.
The discount retailer reported mixed results for the fourth quarter that it blamed on higher labor and tariff costs.
For the fourth quarter, the company reported adjusted earnings per share of $1.79, near the high end of the company’s guidance range. In a statement, CEO Gary Philbin said the support teams for both Dollar Tree and Family Dollar are now working in one consolidated center, which will drive greater efficiencies.
“I am proud of the team’s accomplishments in 2019, including the successful consolidation of our store support centers, the material acceleration in the Family Dollar store optimization program where we continue to see strong performance at renovated stores, and the initial launch of our Dollar Tree Plus! initiative. For the fourth quarter, despite the compressed holiday shopping season, we delivered positive comps for the enterprise, while managing margins and costs effectively to achieve adjusted earnings per share near the top of our guidance range,” said CEO Gary Philbin. “Our support functions are now working together in one location under one leadership team; which we expect will build greater collaboration, efficiencies and teamwork to enable us to support Dollar Tree and Family Dollar stores more effectively. Fiscal 2019 was a very important year for our organization to further develop the foundation to grow and improve our business.”
For the period ended Feb. 1, net sales increased 1.8% to $6.32 billion from $6.21 billion in the prior year’s fourth quarter. Overall same-store sales (Dollar Tree and Family Dollar) increased 0.4%. Same-store sales for the Dollar Tree segment increased 1.4% on a constant currency basis (or 1.5% when adjusted to include the impact of Canadian currency fluctuations). Same-store sales for the Family Dollar segment decreased 0.8%.
Gross profit increased 2.5% to $1.96 billion in the quarter compared to the prior year’s fourth quarter. As a percentage of net sales, gross margin was 31% compared to an adjusted gross margin of 31.5% in the prior year. The decrease in gross margin was driven by tariffs, partially offset by improved freight costs. Other contributors to the decrease were higher occupancy, distribution and shrink costs as a percentage of net sales.
Selling, general and administrative expenses, including discrete charges, were 27.1% of net sales compared to 65.4% of net sales in the prior year's fourth quarter. Excluding the discrete charges in 2019 and 2018, adjusted selling, general and administrative expenses as a percentage of net sales were 21.9%, compared to 21.3% in the prior year’s quarter. The increase was driven primarily by higher payroll and depreciation costs.
Operating income for the quarter was $249.4 million compared with an operating loss of $2.15 billion in the same period last year. Excluding the discrete charges from the fourth quarter of both years, adjusted operating income for the quarter was $580.4 million compared with $632.6 million in the prior year’s period. Adjusted operating income margin was 9.2% of net sales in the fourth quarter compared to 10.2% of net sales in last year’s quarter.
Net income was $123 million in the fourth quarter and GAAP diluted earnings per share for the quarter were 52 cents compared to a loss of $9.69 per share in the prior year’s quarter. Excluding discrete costs from the fourth quarter of both years, adjusted diluted earnings per share were $1.79 in fiscal 2019, compared to $1.90 in fiscal 2018.
During the quarter, the company opened 112 new stores, expanded or relocated 17 stores, and closed 95 stores. Additionally, the company opened 10 Dollar Tree stores that were re-bannered from Family Dollar and completed five renovations to the Family Dollar H2 format. Retail selling square footage at quarter end was approximately 121.3 million square feet.
Dollar Tree's 2020 outlook predicts further sales gains ahead, but also described several major headwinds to the business. Chief among these are tariff charges, which are set to pressure earnings by nearly $50 million in the first half of the year. The retailer expects profit trends to improve later in the year, leading to earnings of between $4.80 per share and $5.15 per share compared to $4.76 per share in 2019.
The company’s fiscal 2020 outlook includes an estimated incremental impact of $47 million related to tariffs, with nearly all of it being incurred in the first half of the year. Additionally, the outlook includes an estimated impact of $15 million related to the new clean fuel regulations for ocean shipping. The outlook does not include any potential impact related to the supply chain or other aspects of the company’s business for the COVID-19 coronavirus.
The company estimates consolidated net sales for the first quarter of 2020 will range from $5.89 billion to $5.99 billion, based on a low single-digit increase in same-store sales for the enterprise. Diluted earnings per share for the quarter, including tariff costs, are estimated to be in the range of $1 to $1.09. The discounter estimates a low single-digit increase in same-store sales and approximately 3.1% selling square footage growth.
“As we enter 2020, our teams are aligned, energized and focused. Plans for the year include approximately 1,250 Family Dollar H2 renovations, the launch of Dollar Tree Plus! 2.0 initiative, and a focus on driving sales, improving gross margin and managing costs effectively,” Philbin added. “While our first quarter outlook includes expected pressure from the incremental tariffs and promotional activity, we believe we are well-positioned to deliver improved sales, operating margin and earnings in the following three quarters and for full-year fiscal 2020. We are focused on growing and improving our business to deliver long-term value to our shareholders.”