DLTR Dollar Tree Inc

By Lisa Beilfuss 

Dollar Tree Inc. swung to a loss in its latest quarter as the discount retailer integrates its recently acquired rival.

The Virginia-based chain, which in July completed its $9 billion acquisition of Family Dollar Inc., now operates nearly 14,000 stores across the U.S. and Canada.

Adjusted profit rose and sales benefited from the addition of new stores, but the 48% revenue increase fell short of analysts' expectations. Shares in the company fell 8% in afternoon trading, erasing much of their year-to-date gain.

Dollar stores like Dollar Tree have poached market share from bigger rivals such as Wal-Mart Stores Inc. by offering less-expensive, everyday products and by scattering more small-footprint stores in locations that make it easy for shoppers to run errands quickly.

And in the second quarter, Dollar Tree again outperformed Wal-Mart: Sales at stores open at least a year rose 2.7% compared with a 1.5% increase at Wal-Mart. However, the sales, which exclude the newly acquired Family Dollar stores, fell short of the 3.3% increase analysts anticipated and were a bit shy of the 2.8% gain competitor Dollar General Corp. reported last week. Adjusted for swings in the Canadian dollar, same-store sales grew 2.4% in the latest period. The gain came amid increased traffic and a higher average ticket.

Chief Executive Bob Sasser said Dollar Tree has "quickly initiated our integration plan" and the company is on track to deliver $300 million in annual run-rate synergies by the end of the third year after the acquisition.

The synergy piece, Chief Financial Officer Kevin Wampler said on a call with analysts, "is going to be a bit of a marathon not a sprint."

According to Cantor Fitzgerald analyst Laura Champine, "management's synergy estimates appear very conservative," and don't include operational improvements expected as Family Dollar stores "benefit from Dollar Tree's strong management and superior merchandising team."

Still, Ms. Champine is looking for a gross margin of 32.9% this year, up from the 28.4% the company reported for the second quarter but below the 34.2% a year ago. Some of the difference is structural--Family Dollar margins were lower and the product mix is different--and long-term gross margin for the combined company is seen as below stand-alone Dollar Tree's gross margin, Ms. Champine said.

As a result of the acquisition and integration, Dollar Tree said it would refrain from providing earnings guidance for the current quarter and pulled its per-share profit guidance for the full year. Previously, the company said it expected to earn an adjusted $3.32 to $3.47 this year.

As part of the regulatory clearance for the merger, Dollar Tree is required to sell 330 Family Dollar stores. Mr. Wampler said those stores represent about $45.5 million in annual operating income. In addition to losing that income, the CFO said the company also expects to incur $5 million to $10 million in related expenses.

For the business year ending in January, the retailer expects to report revenue of $15.3 billion to $15.52 billion, based on a low single-digit increase in same-store sales and short of the $15.57 billion analysts predicted.

Overall, Dollar Tree reported a loss of $98 million, or 46 cents a share, down from a profit of $121.5 million, or 59 cents, a year earlier. Excluding merger-related costs, among other items, per-share profit fell to 25 cents from 61 cents. In the Dollar Tree segment--reflecting stand-alone, premerger results--earnings per share rose to 67 cents from 61 cents.

Revenue rose 48% to $3.01 billion. Family Dollar contributed $811.6 million.

The company had guided for adjusted earnings per share of 63 cents to 68 cents.

Analysts, according to Thomson Reuters, predicted revenue of $3.04 billion.

Write to Lisa Beilfuss at lisa.beilfuss@wsj.com

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(END) Dow Jones Newswires

September 01, 2015 14:28 ET (18:28 GMT)

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