Dollar Tree's profit beats estimates as merchandise costs fall

Pedestrians walk past a Dollar Tree Inc. store in Detroit, Michigan, U.S.
Sean Proctor | Bloomberg | Getty Images

Dollar Tree, the biggest U.S. dollar-store chain after its acquisition of Family Dollar in 2015, reported a better-than-expected quarterly profit on Tuesday, helped by lower merchandise costs and freight expenses.

Shares of the company, whose same-store sales also beat expectations, gained 8 percent on the day.

Dollar-stores such as Dollar Tree and Dollar General have been expanding aggressively in recent years, taking market share from Wal-Mart Stores and other retailers, thanks to their smaller store sizes, improving product assortment and prices starting at $1.00.

Wal-Mart has been fighting back, however, spending heavily to better stock its shelves and cutting prices on food.

"We believe that these results demonstrate the Family Dollar acquisition is paying dividends and remains firmly on course in terms of the savings and benefits Dollar Tree promised investors," Neil Saunders, chief executive of research firm Conlumino, said in an email.

Greater operating efficiencies at Family Dollar and better-quality merchandise have also helped to boost margins, he said.

Dollar Tree completed its $8.5 billion acquisition of Family Dollar in July last year, meaning the latest quarter was the first in which there was a true year-on-year comparison of the combined company's performance.

Chief Executive Bob Sasser, speaking to analysts on a conference call, said he believed Dollar Tree would surpass its target of synergies of $300 million in the three years after the closing of the Family Dollar deal.

Dollar Tree has been refurbishing many Family Dollar stores and improving their product assortments and customer service while re-badging some as Dollar Tree outlets. Family Dollar customers tend to have lower incomes than Dollar Tree customers.

While Family Dollar's sales fell 5.2 percent to $2.53 billion in the third quarter ended Oct. 29, gross profit increased 5.6 percent to $663.2 million.

Dollar Tree's sales at stores open more than a year rose 1.7 percent in constant-currency terms, beating the 1.4 percent rise expected by analysts polled by researcher Consensus Metrix.

Chesapeake, Virginia-based Dollar Tree's net income more than doubled to $171.6 million, or 72 cents per share. The prior year included charges related to Family Dollar.

Excluding items, the company earned 81 cents per share, beating the average analysts' estimate of 78 cents, according to Thomson Reuters I/B/E/S. Net sales rose 1.1 percent to $5.00 billion, shy of the average estimate of $5.07 billion.

Up to Monday's close of $81.99, Dollar Tree's shares had risen 6.2 percent since the start of the year.