Shares fall 9% as deliveries fall short of market expectation
Elon Musk’s company delivers 90,i wouldn't do anything for a klondike bar but700 vehicles in fourth quarter
Deliveries of Tesla’s Model 3 sedan, such as these outside a Tesla showroom in Littleton, Colorado, were less than expected.
Photograph: David Zalubowski/AP
Tesla more than tripled deliveries of its electric cars in the last three months of the year but the news was not enough for Wall Street, which sent the company’s shares into a tailspin following news that sales of its first mass market vehicle were less than expected.
Elon Musk’s car company delivered a total of 90,700 vehicles in the fourth quarter, up from 29,870 a year earlier. But deliveries of the Model 3 sedan, Tesla’s cheapest vehicle, were less than expected. The company announced it had delivered 63,150 vehicles in the quarter, up from 1,550 in the same period last year but below the 64,900 analysts had been expecting.
The company also fell just short of its promise to deliver 100,000 Model S and Model X vehicles during the year. Tesla delivered 13,500 Model Ss and 14,050 Model Xs in the fourth quarter, raising the total for the year to 99,394 compared with about 100,000 in 2017.
Tesla’s shares sank heavily in morning trading, falling over 9% when markets opened. The slide was not helped by an overall fall in the US stock markets.
The company also announced on Wednesday that it was cutting the price of its Model S, Model X and Model 3 vehicles by $2,000 in the US. The move will partly offset the expiration of a $7,500 federal tax credit for electric vehicle purchases that will be phased out this year.
Musk made an
all-out push
to boost sales of the Model 3 last year as the end of the tax break approached.
After several production and delivery snafus Tesla finally reached a self-imposed deadline to produce 5,000 Model 3s a week at the end of June.
The news comes after a tumultuous year for the company and Musk. Tesla’s billionaire
founder was fined
by the Securities and Exchange Commission (SEC) after making misleading comments that he intended to take the company private.
Musk also hit the headlines in a series of bizarre incidents that included calling a British diver who helped rescue children trapped in a
Thai cave a “pedo”
and apparently
smoking marijuana
on a popular podcast.
The SEC demanded Musk appoint independent oversight to Tesla’s board. In late December Tesla announced the Oracle founder Larry Ellison and Kathleen Wilson-Thompson, executive vice-president and global chief human resources officer of Walgreens Boots Alliance, would join Tesla as independent directors.
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As shown below, the results in the quarter materially changed the trend in two-year stacked comps for each of the banners, along with a significant acceleration for consolidated comps.
The increase in consolidated comps was the primary driver of an 8% increase in revenues to $6.3 billion. The company ended the quarter with 15,370 locations, up less than 1% year-over-year. This reflects a 7% increase in Dollar Tree units, offset by a 4% decline in Family Dollar units.
The top-line results at each banner flowed through to their respective income statements, with Dollar Tree gross margins and operating margins declining year-over-year while Family Dollar gross margins and operating margins expanded year-over-year. On a consolidated basis, gross margins contracted by 120 basis points in the quarter to 28.5%, reflective of a shift to lower-margin consumables, tariff costs and the impact of markdowns from the Easter headwinds at the Dollar Tree banner. The company saw slight operating leverage on SG&A from higher comps, with the net result being an 80 basis point contraction in operating margins to 5.8%, with operating income declining 5% to $366 million. This is not adjusted for $73 million of pandemic-related costs, such as PPE supplies.
In the first quarter, the company opened 85 stores (net of closures) and completed 220 Family Dollar renovations to the H2 format. Importantly, comps at renovated Family Dollar stores continue to outpace the chain average by more than 10%. On the call, management indicated that they plan on reducing both the number of new store openings (from 550 to 500) and the number of H2 renovations (from 1,250 to 750) in 2020.
Personally, given the fact that Family Dollar is seeing material benefits to its business from the pandemic with new or lapsed customers coming into its stores, I think the company should try to get more aggressive with its renovation plans, not less. On the other hand, you could argue that renovations cause short-term disruptions and limit their ability to fully capitalize on the business momentum they are currently experiencing.
As a result of fewer new stores and remodels, management now expects 2020 capital expenditures to total $1.0 billion compared to previous guidance of $1.2 billion. In addition, the company has temporarily suspended share repurchases. At quarter's end, the company had $1.8 billion in cash on its balance sheet compared to $4.3 billion in total debt.
Conclusion
In recent years, Dollar Tree has been a tale of two cities. While its namesake banner has generally delivered impressive financial results, Family Dollar has been a persistent underperformer. This quarter, those results flipped, and given what we've seen in the weeks since quarter's end, there's a decent possibility that we will see something similar in the coming months. As the CEO noted, the second quarter is off to a very good start at Family Dollar.
Here's the important question: how useful is that information is in terms of making future predictions about the business? Will recent success at Family Dollar translate into long-term success for the banner? The optimistic take is that new or lapsed customers, especially those visiting the renovated stores, could become recurring business for the banner. The pessimistic take is that they have experienced short-term success out of necessity as people went to any store that was open to try and find essentials like toilet paper and hand sanitizer that were largely out of stock throughout the retail landscape. From that view, many of these customers could abandon the retailer when life returns to normal. As Philbin noted on the conference call, early on [during the pandemic], folks needed us. Will people still shop as much at Family Dollar when it's no longer a necessity?
Personally, I do not place too much weight on the recent results. I will need to see incremental data points that indicate that Family Dollar has truly won sustained business from these new customers. While I still believe that the Dollar Tree banner is a well-positioned retailer with attractive unit returns, I'm not yet willing to say the same thing for Family Dollar. For that reason, along with the recent run-up in the stock price, I plan on staying on the sidelines for now.
Disclosure: None
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