【a shoulder to cry on webtoon】Daseke Sees Flatbed Softness Continuing Through First Half Of 2020
Thea shoulder to cry on webtoon nation's largest flatbed carrier,
Daseke Inc
. (NASDAQ:
DSKE
), expects "general industrial softness" and a "sustained weakness" in the oil and gas markets to continue through the first half of 2020. On the company's earnings conference call, Daseke's management team said that the market has been softer in the first quarter when compared to the fourth quarter of 2019.
When asked for specifics, management said that oil rig counts are "down hard," but its wind-energy business has provided a substantial offset. Management said that the company's exposure to the oil and gas markets was 13% during 2019.
When pressed on the impacts of the coronavirus, management said that the bulk of the company's business is domestic, but that they have seen a drop in container volumes. Further, they said that one customer project that is tied to Chinese components has been delayed.
The Dallas area-based carrier reported an adjusted net loss of $0.12 per share for the fourth quarter of 2019, better than analysts' forecasts for a $0.20 per share loss, but worse than management's recently updated guidance.
At the end of January, Daseke issued a press release increasing its financial expectations to the "high-end" of its prior guidance range for fourth-quarter and full-year 2019. The new expectation called for a fourth-quarter adjusted net loss of only $6 million to $2 million, or roughly $0.09 to $0.03 per share. While total fourth-quarter revenue of $403 million, down 10% year-over-year, was within management's new guidance, the $7.8 million adjusted net loss was not.
Further, Daseke's full-year 2019 adjusted net income of $2.1 million missed management's updated full-year 2019 guidance of $3 million to $7 million.
"Adjusted" figures exclude items expected to be non-recurring, like transformation, restructuring and impairment charges. In 2019, Daseke recorded $312.8 million in impairment charges as valuations of prior acquisitions declined mostly due to the declines in used truck prices.
Next Phase Of Restructuring
The carrier continues to
restructure operations after a decade of acquisitions
. Daseke remains on track with "Phase I" of its restructuring plan, which lowered the company's tractor count, trailer count and non-driver headcount each by 8% and is expected to achieve an annual run rate of $30 million in incremental operating income by the end of first quarter 2020.
"2019 proved to be a year of significant transformation for Daseke, as we took aggressive action to streamline the business, reset our leadership team, and reposition the company to drive profitable growth in the future," said Daseke CEO Chris Easter.
Story continues
Easter was
named Daseke's permanent CEO
last month after serving in the role on an interim basis for six months after the company's founder and CEO
Don Daseke stepped down
.
Additionally, the company announced "Phase II" of the improvement plan. This phase is expected to deliver a run rate of an additional $15 million in operating income by the end of 2020. Like Phase I, this phase will integrate three more previously acquired operations, taking its total number of separately operated business units from 13 to 10. (Phase I provided a reduction in standalone carriers from 16 to 13.) Other "business improvement actions" are expected to be taken as well.
Easter continued, "In total, we expect that Phase I and II of our Operational Improvement Plan, which began in August 2019, will deliver $45 million in annual operating income improvements as we enter fiscal 2021, and will position the company for more profitable growth as the industrial market improves."
Fourth-Quarter Results
Daseke reported revenue declines in both of its specialized and flatbed divisions due primarily to "lower freight rates and lower miles driven."
Daseke's Key Performance Indicators
The company's specialized segment saw a 7% year-over-year decline in total revenue to $257 million due to "softer oil & gas related end markets." The division's average tractor count was 114 units lower and rate per mile declined 5% to $3.43 in the period.
The division reported a 94.5% operating ratio (OR), 150 basis points (bps) worse year-over-year. In addition to demand weakness, management noted strength in wind-energy markets and the sale of underutilized equipment as offsets to further margin degradation.
The flatbed division reported a 13% decline in total revenue at $150 million compared to the fourth quarter in 2018. The average tractor count declined by 44 units year-over-year with a 4% decline in rate per mile at $1.87. The division reported a 200-bp improvement in OR at 93.8% given improved brokerage margins, which were partially offset by "softness in manufacturing- and construction-related end markets."
Daseke ended 2019 with net debt of $608.4 million, $48 million lower year-over-year. The company generated $130 million in free cash flow during the year, allowing it to pay down debt and fund its capital expenditures (capex). Daseke's leverage ratio, net debt-to-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) excluding one-time items, was 3.18x at the end of the year. Management said that the leverage ratio may move higher in the first half of 2020 as 80% of its planned $75 to $80 million in capex will occur then.
Guidance
Daseke's full-year 2020 guidance calls for revenue to be in the range of $1.61 to $1.69 billion and adjusted EBITDA of $170 to $180 million compared to $170.9 million in 2019. Management said that they expect volumes to be "relatively flat" year-over-year in 2020 with rate pressure in the first half, subsiding in the back half as flatbed truck capacity tightens.
Management highlighted $32 million in EBITDA headwinds stemming from pricing and volume declines given lower U.S. oil rig activity as well as higher insurance expenses. However, they expect these headwinds to be offset by $36 million in restructuring initiatives.
Management said that their guidance doesn't include any potential impact from the coronavirus.
Shares of DSKE are 15% lower on the day.
Image by
skeeze
from
Pixabay
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- ·5%, led by a 17% increase in average ticket and a slight decline in traffic. Growth in the quarter reflected the impact of households stocking up on essentials like paper goods and cleaning supplies as the pandemic became a nationwide concern, along with strength in discretionary categories as the quarter came to a close and stimulus dollars and tax refunds were disbursed.
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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