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Dollar tree takes hit from acquisition costs.

CHESAPEAKE, Va. -- Although expenses related to the acquisition of Family Dollar Stores Inc. drove Dollar Tree Inc. into the red for the second quarter, earnings adjusted to exclude the Family Dollar component exceeded Wall Street's expectations. Net sales and same-store sales, however, came in below analysts' average forecast, as did management's sales projection for the fiscal year.

In the first quarterly report that included results--for one month--from Family Dollar, the consolidated bottom line for the 13 weeks ended August 1 swung to a net loss of $98 million, or 46 cents per diluted share, from a year-ago profit of $121.5 million, or 59 cents per share. The results for the most recent quarter included $151.5 million, or 70 cents per share, in net, after-tax, acquisition-related expenses, while net income for the prior-year quarter reflected $4.6 million, or 2 cents per diluted share, in acquisition-related costs. Factoring out the acquisition-related items in both quarters, adjusted net income plunged 57.6% to $53.5 million, or 25 cents per share, from $126.1 million, or 61 cents per share, a year ago.

Further excluding Family Dollar's $95 million operating loss, pretax interest expense of $263.9 million, $16.5 million in acquisition fees and $8.2 million in net adjusted interest expense, adjusted pretax income for the Dollar Tree operating segment was $225 million. Factoring in income taxes of $86.1 million, adjusted net income for the core segment climbed 10.2% over adjusted prior year levels to $138.9 million, or 67 cents per share--5 cents ahead of the average estimate of analysts polled by Thomson Reuters.

The top line, meanwhile, skyrocketed 48.3% to $3.01 billion, short of analysts' average forecast of $3.04 billion, driven by $811.6 million in Family Dollar revenues. Excluding those new revenues, sales would have grown 8.3% (see story below for full details of the Dollar Tree segment performance).

"I am extremely proud of Dollar Tree's accomplishments in the second quarter," chief executive officer Bob Sasser said in a statement. "We delivered our 30th consecutive quarter of positive same-store sales, broke ground on our Southeast distribution center in South Carolina, successfully completed our acquisition of Family Dollar, and quickly initiated our integration plan."

Taking a closer look at operating results, consolidated gross margin lost 577 basis points to 28.4%, largely due to $60 million of markdown expense for the Family Dollar segment as a result of SKU rationalization and planned liquidations, as well as the overall lower-margin product mix in the Family Dollar stores. In addition, the company booked $11.1 million in amortization of Family Dollar inventory.

Consolidated selling, general and administrative (SG&A) expense, meanwhile, expanded by 22 basis points to 24.3% of sales. Excluding $17.7 million in pretax acquisition-related costs in the most recent quarter and $7.5 million a year ago, though, adjusted SG&A expense was flat at 23.71% of sales. As a result, reported operating income for the second quarter plunged 39.8% to $123.4 million, while adjusted operating profit fell 33.6% to $141.1 million.

Net interest expense exploded more than 31-fold to $263.9 million, pushing pretax results to a loss of $142.2 million from a $196.1 million profit a year ago. Excluding the acquisition-related SG&A expenses in both years and $227.6 million in interest expense this year, adjusted pretax earnings dove 49.5% to $103.1 million.

The bottom line for the first half sank to a $28.5 million loss from a year-ago profit of $259.7 million. Excluding $229.3 million in after-tax acquisition-related expenses in the 2015 span and $4.6 million a year ago, adjusted net income fell 24% to $200.8 million from $264.3 million.

Gross margin for the six months shrank by 358 basis points to 30.92%, while SG&A expense swelled 39 basis points to reach 24.05% of sales. Backing out acquisition-related expenses in both years, though, the adjusted SG&A ratio added just 4 basis points to 23.51% of sales. Reported operating income declined 18.4% to $356.3 million, while adjusted results dipped 13.5% to $384.4 million.

With year-to-date net interest expense soaring more than 23-fold to $386.2 million, pretax results swung to a reported loss of $29 million from a prior-year profit of $420.3 million. Adjusted pretax profit decreased 20% to $342.3 million.

Looking ahead, management declined to provide earnings guidance for the third quarter or fiscal year due to issues stemming from the acquisition. Consolidated net sales are now expected to range between $15.30 billion and $15.52 billion, shy of the $15.57 billion expected by analysts. Third quarter sales are projected to range from $4.78 billion to $4.87 billion, also below the average estimate of $4.91 billion among analysts.
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Title Annotation:MONEY
Date:Oct 5, 2015
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