North America’s leading operator of discount variety stores, today reported financial results for its fourth quarter and fiscal year ended February 2, 2019.
“Sales for the quarter were strong,” stated Gary Philbin, President and Chief Executive Officer. “Our results demonstrate the increasing strength of the Dollar Tree brand, and accelerated progress on the Family Dollar turnaround, as Family Dollar delivered its strongest quarterly same-store sales growth of the year.”
Philbin continued, “We are confident in our progress and we have good momentum. Our merchants at both banners have delivered a 2019 plan that we believe overcomes most of the effect of tariffs at the 25% level, and provides opportunity for margin improvements if tariffs are not increased. We moved aggressively in the fourth quarter to optimize Family Dollar’s performance, including closing 84 stores and announcing plans to renovate at least 1,000 stores in 2019. The renovated stores will include new $1.00 Dollar Tree merchandise sections. Approximately 200 Family Dollar stores will be re-bannered to Dollar Tree, and we plan to close as many as 390 Family Dollar stores this year. We also recorded an inventory reserve in part because of the different inventory needs of this new optimized store base. Excluding this markdown and the non-cash goodwill impairment charge related to Family Dollar, the combined companies performed well in the quarter.”
Fourth Quarter Results
In the fourth quarter, the Company incurred several discrete charges, as described below:
Based on the Company’s strategic and operational reassessment of the Family Dollar segment, management determined there were indicators that the goodwill of the business may be impaired. Accordingly, a goodwill impairment test was performed in the fourth quarter of fiscal 2018. The results of the impairment test showed that the fair value of the Family Dollar business was lower than the carrying value resulting in a $2.73 billion non-cash pre-tax and after-tax goodwill impairment charge.
$40.0 million SKU rationalization markdown reserve related to the Family Dollar segment.
$13.0 million non-cash impairment of certain store assets.
$1.5 million acceleration in non-cash deferred financing costs associated with the prepayment of the Company’s $782 million term loan facility.
Discrete items, or adjustments, for fiscal 2018 and 2017 are included in the Reconciliation of Non-GAAP Financial Measures within the tables of this earnings release.
For the fourth quarter, including the impact of each of the items listed above, the Company reported a GAAP loss per share of $9.66. Adjusted earnings per share for the quarter, excluding the impact of the identified items, was $1.93, near the high end of the Company’s guidance range.
Consolidated net sales for the thirteen-week fourth quarter 2018 were $6.21 billion, compared to $6.36 billion in the prior year’s fourth quarter, which included fourteen weeks. Excluding $406.6 million of sales from the extra week in the prior year’s quarter, consolidated net sales increased 4.2%. On a constant currency basis, enterprise same-store sales increased 2.4% (or 2.3% when adjusted to include the impact of Canadian currency fluctuations). Same-store sales for the Dollar Tree banner increased 3.2% on a constant currency basis (or 3.1% when adjusted to include the impact of Canadian currency fluctuations). Same-store sales for the Family Dollar banner increased 1.4%.
Gross profit for the quarter was $1.91 billion, compared to $2.10 billion in the prior year’s fourteen-week quarter. As a percentage of sales, gross margin decreased to 30.8% compared to 33.0% in the prior year. The decline was driven primarily by higher markdowns, including a $40.0 million SKU rationalization markdown reserve at Family Dollar, domestic freight, shrink, distribution costs, and occupancy costs which de-levered due to cycling the extra week in the prior year’s fourth quarter, partially offset by lower merchandise costs.
Selling, general and administrative expenses for the quarter, including discrete charges, were 65.4% of sales compared to 21.0% of sales in the prior year’s fourth quarter. Excluding the discrete charges from the current year’s quarter and the receivable recovery and workers compensation reserve from the prior year’s quarter, selling, general and administrative expenses were flat at 21.3% of sales for the current and prior year’s quarters.
Including discrete charges, operating loss for the quarter was $2.15 billion compared with operating income of $765.6 million in the same period last year. Excluding the discrete charges from the current year’s quarter and the receivable recovery and workers compensation reserve from the prior year’s quarter, operating income for the quarter was $632.6 million compared with $743.2 million in the same period last year and adjusted operating income margin was 10.2% in the current quarter compared to 11.7% of sales in last year’s fourteen-week quarter.
The Company’s effective tax rate for the quarter was 5.1% compared to a benefit of 50.4% in the prior year period. The rate in 2018 is the result of the goodwill impairment charge not being tax deductible. The prior year benefit was the result of the Tax Cuts and Jobs Act (“TCJA”). Among other changes to existing tax laws, the TCJA reduced the federal corporate tax rate from 35% to 21% effective January 1, 2018. The effective tax rate for the prior year’s quarter included a $562.0 million non-cash benefit resulting from the re-measurement of the Company’s net deferred tax liabilities to reflect the lower statutory rate of 21%. The total benefit from the TCJA for the fourth quarter of fiscal 2017 was $583.7 million.
Net loss for the quarter, including discrete charges, was $2.31 billion and GAAP diluted loss per share was $9.66 compared to diluted earnings per share of $4.37 in the prior year’s quarter. On an adjusted basis, diluted earnings per share increased 2.1% to $1.93 compared to an adjusted $1.89 in the prior year’s fourteen week-quarter. The extra week in the fourth quarter of 2017 contributed $0.21 to earnings. On a comparable 13-week basis, adjusted diluted earnings per share increased 14.9%.
During the quarter, the Company opened 143 stores, expanded or relocated 14 stores, and closed 84 Family Dollar stores and 10 Dollar Tree stores. Additionally, the Company opened five Dollar Tree stores that were re-bannered from Family Dollar. Retail selling square footage at quarter end was approximately 120.1 million square feet.
Source: Dollar Tree