Retailers

Cautious Outlook Sinks Dollar Tree Stock

Reaction follows gains in sales and profits in Q4

Dollar Tree Inc. posted healthy gains in sales and profits for the fiscal fourth quarter, but its forecast for the year ahead evidently wasn’t robust enough for investors, which punished the stock Wednesday.

The Chesapeake, Va.-based discounter saw its valuation sink by nearly $4 billion on a stock price drop of more than 15% late Wednesday, indicating investors may have been uneasy about a combination of rising freight and employee costs, and potential effects of proposed cuts in federal food assistance programs impacting results for the company and its lower-income shoppers this year.

Dollar Tree said it would invest about $100 million of its estimated $250 million in federal tax benefits in employee training, wages and benefits this year, with an eye on improving store conditions and keeping pace with similar wage hikes across the retail sector.

Those expectations were baked into a forecast calling for 52-week 2018 sales of $22.7 billion to $23.1 billion, a low-single-digit comp increase, and diluted earnings per share of $5.25 to $5.60.

In the 53-week 2017 fiscal year ended Feb. 3, Dollar Tree posted sales of $22.2 billion, comps of 3.4% and diluted earnings per share of $7.21.

In the fourth quarter, Dollar Tree posted sales of $6.4 billion and comps of 2.4%. Gross profits jumped to 33% of sales from 32.1%.

Capital expenditures are expected to rise this year to $875 million to $890 million and call for 650 new stores, 100 remodels and 450 renovations of Family Dollar stores. The chain will also add or expand refrigerated food cases at 1,000 stores and add adult beverage departments to around 700 stores this year.

CEO Gary Philbin in a conference call with analysts defended the decision to invest tax savings in workers, and emphasized the company would be “disciplined” about how that money is spent and confident it would result in better run stores.

“We’re going to invest with the same businesses savvy where we say, 'Where can we get $1.50 back where we invest $1?'” he said. “I think an investment in our people ought to show up in better run stores; stores that are better in stock around the seasons and in good shape on the first of the month.

“While everybody is doing this, in the value sector we have the best chance to see our customers react to it quickly.”

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