Dollar Tree Inc. (NASDAQ:DLTR)

The period under review demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, beginning at US$1,187,252 thousand, increasing to US$1,636,265 thousand, then experiencing a substantial decline to a negative US$1,112,626 thousand, followed by recovery to US$1,176,670 thousand, further increasing to US$1,686,673 thousand, and concluding at US$1,622,053 thousand. Concurrently, the cost of capital generally increased over the period, from 9.90% to 12.07%, with a slight decrease observed in 2020. Invested capital also showed variation, initially increasing slightly before decreasing and then rising again to US$18,201,900 thousand.

Economic Profit Trend

Economic profit consistently remained negative throughout the observed period. The magnitude of the negative economic profit increased significantly in 2019, reaching US$-3,043,004 thousand, representing the lowest point. While the negative economic profit lessened in subsequent years, it did not turn positive. The most recent period shows a negative economic profit of US$-574,418 thousand.

Relationship between NOPAT and Economic Profit

A clear relationship exists between NOPAT and economic profit. Years with higher NOPAT, such as 2018 and 2021, corresponded with less negative economic profit figures compared to years with lower or negative NOPAT, like 2019. However, even during periods of positive NOPAT, the cost of capital remained high enough to result in an overall economic loss.

Cost of Capital Impact

The increasing cost of capital appears to have exerted downward pressure on economic profit. As the cost of capital rose, the economic profit became more negative, even when NOPAT remained relatively stable or increased. This suggests that the returns generated by the invested capital were not consistently exceeding the cost of obtaining that capital.

Invested Capital and Economic Profit

Changes in invested capital do not appear to have a direct, consistent correlation with economic profit. While invested capital decreased in 2019, coinciding with the largest negative economic profit, it also decreased in 2020 with a less severe economic loss. This suggests other factors, such as NOPAT and cost of capital, are more influential drivers of economic profit.

In summary, the period was characterized by a consistent inability to generate economic profit, despite fluctuations in NOPAT and invested capital. The rising cost of capital appears to be a significant contributing factor to this outcome.

Net Income (Loss) Trend

The net income exhibited significant fluctuations over the observed periods. Initially, there was a substantial increase from approximately $896.2 million in early 2017 to about $1.714 billion in early 2018. However, this positive trend was interrupted by a reversal in early 2019, where the net income turned negative, with a loss of approximately $1.59 billion. Subsequently, the company recovered, returning to positive net income values, rising to around $827 million in 2020, followed by further increases to $1.342 billion and $1.328 billion in 2021 and 2022, respectively. This pattern indicates a volatile earnings performance with a notable setback in 2019 but a steady recovery thereafter.

Net Operating Profit After Taxes (NOPAT) Trend

The net operating profit after taxes mirrored a similar trajectory to net income. It rose from about $1.187 billion in 2017 to $1.636 billion in 2018, before experiencing a substantial downturn to a negative $1.11 billion in 2019. Following this decline, NOPAT rebounded to approximately $1.177 billion in 2020 and continued to improve to $1.687 billion in 2021. In 2022, there was a slight decrease to around $1.622 billion, although levels remained strong relative to the earlier years except for 2019. The NOPAT trend reflects the operational challenges faced in 2019 and subsequent recovery, showcasing operational resilience in the following years.

Insights and Observations

The financial performance over the six-year span reveals a company experiencing cyclical volatility, with 2019 marking a particularly challenging year, featuring declines in both net income and operational profitability into negative territory. The recovery phase post-2019 was marked by restored profitability and an ability to sustain high levels of operating profit, suggesting effective management responses and operational adjustments. The relative stability of net income and NOPAT in the last two periods indicates a stabilization phase, with strong earnings sustained despite minor fluctuations. Overall, the patterns suggest responsiveness to external or internal challenges and a capacity for financial recovery and growth.

Provision for Income Taxes

The provision for income taxes shows considerable fluctuation over the six-year period. It started at a high value of 433,200 thousand US dollars in early 2017, then sharply declined to a negative figure of -10,300 thousand US dollars in early 2018, indicating a possible tax benefit or adjustment during that year. Subsequently, the provision increased again, reaching 281,800 thousand US dollars in early 2019 and maintaining similarly elevated levels in the following years, with values of 271,700, 397,900, and 304,300 thousand US dollars in early 2020, 2021, and 2022 respectively. Overall, the provision exhibits volatility, but generally remains in the positive range, with a notable exception in 2018.

Cash Operating Taxes

Cash operating taxes demonstrate a clear declining trend from 2017 through 2020. Initially, the amount stood at 786,228 thousand US dollars in early 2017 and decreased steadily over the next three years to 664,515, 424,099, and 353,258 thousand US dollars by early 2018, 2019, and 2020 respectively. After 2020, this figure experienced a rebound, increasing to 450,561 thousand US dollars in early 2021, before slightly decreasing again to 411,860 thousand US dollars in early 2022. This suggests a reduction in cash operating tax outflows mid-period, followed by partial recovery in subsequent years.

Total reported debt & leases

The total reported debt and leases show a consistent downward trend from January 28, 2017, to January 30, 2021, decreasing from approximately 12.43 billion US dollars to about 9.64 billion US dollars. This indicates a concerted effort towards debt reduction over this period. However, there is a slight increase in the debt level in the latest period, ending on January 29, 2022, rising to roughly 9.97 billion US dollars.

Shareholders’ equity

Shareholders’ equity exhibits fluctuations over the analyzed periods but generally trends upward. It increased substantially between January 28, 2017, and February 3, 2018, rising from approximately 5.39 billion to 7.18 billion US dollars. This was followed by a decline in the following year to around 5.64 billion US dollars, and then a steady recovery and growth through January 29, 2022, reaching about 7.72 billion US dollars. The overall increase suggests strengthening equity positions over the long term.

Invested capital

Invested capital shows a pattern characterized by an initial increase from January 28, 2017, to February 3, 2018, peaking at approximately 19.85 billion US dollars. Subsequently, there is a decline over the next two years, bottoming out at about 16.99 billion US dollars in February 1, 2020, before a gradual increase resumes, reaching approximately 18.20 billion US dollars by January 29, 2022. This trend suggests a period of contraction followed by renewed investment activities or asset accumulation.

Overall analysis

The data portray a company that has actively managed its capital structure, notably reducing total reported debt over a significant period while recovering from a dip in shareholders’ equity. The invested capital trend aligns with these dynamics, showcasing initial growth, mid-term contraction, and later resurgence. The slight uptick in debt in the most recent reporting period warrants monitoring, although the continuous increase in equity and invested capital indicates a potentially improving financial position.

The analysis reveals a consistently negative economic profit over the observed period, ranging from approximately negative $503 million to negative $3.04 billion. Invested capital demonstrates relative stability, with fluctuations occurring between roughly $16.9 billion and $19.8 billion. The economic spread ratio, calculated from these figures, exhibits considerable volatility.

Economic Spread Ratio Trend

The economic spread ratio began at -3.70% in January 2017, improved to -2.54% in February 2018, then experienced a substantial decline to -17.89% in February 2019. Following this significant drop, the ratio recovered to -3.70% in February 2020, before decreasing again to -1.98% in January 2021. The most recent observation, January 2022, shows a ratio of -3.16%.

The most pronounced shift is the dramatic deterioration in the economic spread ratio during 2019. This coincided with a substantial increase in negative economic profit. While the ratio partially recovered in 2020, it has not returned to the levels observed in the earlier years of the period. The fluctuations suggest a sensitivity of the economic spread ratio to changes in economic profit, even with relatively stable invested capital.

Relationship between Economic Profit and Economic Spread

A strong inverse relationship is apparent between economic profit and the economic spread ratio. Larger negative economic profits consistently correlate with more negative economic spread ratios. The peak in negative economic profit in 2019 directly corresponds to the lowest economic spread ratio observed during the period.

The consistent negative economic profit indicates that the company’s returns on invested capital are not exceeding the cost of that capital. The economic spread ratio provides a percentage representation of this underperformance, highlighting the magnitude of the difference between returns and cost of capital. The observed trends suggest a period of increasing financial strain in 2019, followed by partial recovery, but continued underperformance relative to the cost of capital through 2022.

The economic profit margin exhibited considerable fluctuation over the observed period. While net sales generally increased, economic profit remained negative throughout, impacting the economic profit margin.

Economic Profit Margin Trend

The economic profit margin began at -3.42% in January 2017 and improved to -2.26% in February 2018. However, a substantial decline occurred in February 2019, reaching -13.33%. The margin then recovered to -2.66% in February 2020, followed by a further improvement to -1.37% in January 2021. A slight deterioration was noted in January 2022, with the margin settling at -2.18%.

The most significant shift occurred between 2018 and 2019, where the economic profit margin nearly tripled in negative value. While the margin improved in subsequent years, it did not return to the levels observed in the earlier period. The negative economic profit consistently indicates that the company’s returns are not exceeding its cost of capital.

Relationship to Net Sales

Net sales demonstrated a consistent upward trend throughout the period, increasing from US$20,719,200 thousand in January 2017 to US$26,309,800 thousand in January 2022. Despite this revenue growth, the negative economic profit persisted, suggesting that increases in sales were insufficient to offset the cost of capital and generate positive economic profit. The largest negative economic profit occurred in 2019, coinciding with the highest economic profit margin in negative terms, despite a rise in net sales compared to 2017 and 2018.

The fluctuations in economic profit margin suggest a sensitivity to underlying economic profit drivers, potentially including changes in operating costs, capital employed, or the cost of capital itself. Further investigation into these factors would be necessary to understand the reasons behind the observed trends.