The mood around the latest wave of earnings announcements hit a wall of unrealistic perfectionism in the last few weeks as even great guidance simply wasn't good enough. And then Dollar Tree (DLTR: $100, up 4% this week) reported yesterday morning.
Expectations were low. We were only looking for a scant 2% earnings growth and were steeled to see revenue drop close to 3% from last year's level. Those targets had come down 6% on the bottom line while our outlook on the top weakened 1% since we first recommended the stock almost a year ago. That was all right. We were watching Dollar Tree as a Special Opportunity, a longer-term turnaround story that would pay off when the business shifted back into higher gear.
That shift looks like it's finally happening. Revenue of $6.2 billion was right on our prediction and same store sales climbed 2%, well above the minimal 1% we were looking to see. Earnings of $1.93 per share were right on as well. All good things, but not necessarily great.
What's great is that management confirmed that a quarter of year-over-year sales erosion was an isolated glitch in the overall trend. Guidance of at least $5.74 billion on the top line for 1Q19 will give us 3% improvement and the conference call left the possibility open that Dollar Tree will once again expanding its revenue at a full 5% rate. That's enough to withstand a lot of pressure on the margins. Knowing that negative numbers are behind us is the best proof that the business is turning around.
Of course that turnaround revolves around some tough, but good choices. Dollar Tree will close 400 of the ailing Family Dollar stores it paid $9 billion to buy five years ago and wrote down the value of the chain by close to $3 billion. This is an admission that efforts to integrate the bare-bones Family Dollar concept into the core chain just aren't working. There's no reason to keep throwing money at these stores and letting them remain a drag on the overall numbers.
Dollar Tree is letting go, having tried to absorb a weaker rival and consolidate its share of the Discount Retail category. Now Family Dollar stores are vanishing from the map. Presumably their customer base will get absorbed into Dollar Tree either way, only now it won't cost so much to refit each location and retrain the staff. The future starts now, with relief and a rally. It's no wonder Dollar Tree soared 5% yesterday when most other stocks in the S&P 500 were on the run.
And while we have one last name on our earnings calendar (Cloudera next Wednesday), this big upside surprise in Dollar Tree plays nicely into a solid season for our recommendations. Our core Stocks For Success are up an average of 4.6% after reporting their 4Q18 numbers. The Aggressive and Special Opportunities groups are each up close to 3%. Healthcare, far from sleeping through the season, gained a staggering 7.5%. While our Technology and Real Estate stocks have been a net drag (and most of our High Yield recommendations don't even report on a quarterly basis), it's all part of the normal rotation cycle.
This season's drag may turn into next season's dynamo. Either way, our stocks make money.