Will Dollar Tree (DLTR) Post a Surprise this Earnings Season?

Dollar Tree, Inc. (DLTR) is slated to report its third-quarter fiscal 2014 results on Nov 20. In the last quarter, the company had delivered a negative earnings surprise of 6.15%. Let’s see how things are shaping up for this announcement.

Factors Influencing this Quarter

Though Dollar Tree missed earnings estimates last quarter, both top- and bottom-line results registered significant year-over-year growth. We believe that the company is progressing well with its growth endeavors, including store expansion, omni-channel development, revamping of store formats and ventures into new markets. We also commend its strategic investments toward incorporation of technological advancements and the acquisition of Family Dollar, focused on boosting its top and bottom lines. However, we remain slightly cautious on the company’s results due to rising freight costs which are continuously weighing on its gross margin performance. Moreover, the stock remains vulnerable to sluggish economic recovery and cautious consumer spending.

For this quarter, management expects total sales to be in the range of $2.02–$2.07 billion on the back of low- to mid-single digit comparable store sales growth. Further, the company anticipates earnings in the range of 61–66 cents per share, excluding acquisition-related expenses in the quarter.

Earnings Whispers?

Our proven model does not conclusively show that Dollar Tree is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here, as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate both stand at 65 cents.

Zacks Rank: Dollar Tree carries a Zacks Rank #2 (Buy). Though Zacks Rank #1, 2 or 3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks that Warrant a Look

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Best Buy Co., Inc. (BBY) has an Earnings ESP of +4.17% and a Zacks Rank #1 (Strong Buy).

The Kroger Co. (KR) has an Earnings ESP of +3.28% and a Zacks Rank #2.

Zumiez, Inc. (ZUMZ) has an Earnings ESP of +3.85% and a Zacks Rank #2.

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