Dollar Tree Q2 Results Not As Expected; Full-Year Outlook Revised
Sales for Dollar Tree Inc.’s second quarter, ended Aug. 3, came in toward the low end of its outlook range.
Consolidated net sales inched up 0.7% to $7.37 billion. Enterprise same-store net sales also rose 0.7%, driven by a 1.1% increase in traffic, offset by a 0.5% average ticket decline.
As for performance by banner, Dollar Tree comps increased 1.3% on a 1.4% traffic increase, modestly offset by a 0.1% average ticket decline. While comps were positive in each month, they softened sequentially throughout the quarter. Consumable categories like candy, apparel, snacks and beverages were the best-performing areas in Q2, while higher-margin discretionary categories like crafts, floral and home decor underperformed.
In the Family Dollar segment, customer traffic and average ticket largely offset a comp decline of 0.1%. Comps were positive in the middle month of the quarter and negative in the first and last months. Customer traffic increased 0.7%, while average traffic decreased 0.8%.
“Family Dollar's comp was in line, but Dollar Tree's comp, while positive, was lower than we expected,” said COO Mike Creedon during the company’s earnings call. “As we have seen for several quarters now, demand from Family Dollar's core lower-income customer remains weak. Dollar Tree has a broader customer base that includes more middle- and upper-income households.”
Creedon explained that beginning this quarter, the company started to see inflation, interest rates, and other macro pressures have a more pronounced impact on the buying behavior of these customers, thereby affecting Q2 comp performance.
Dollar Tree’s adjusted diluted earnings per share (EPS) of 67 cents was 38 cents below the midpoint of its June outlook.
Adjusted operating income was $218 million, a 24% drop from last year. Adjusted operating margin decreased by approximately 90 basis points to 3%, reflecting an 80-basis-point increase in gross margin, offset by a 180-basis-point increase in adjusted SG&A rate.
Adjusted SG&A increased primarily from the general liability adjustment, higher depreciation, temporary labor for Dollar Tree's multi-price rollout, higher utility costs, and sales deleverage, partly offset by lower incentive comp cost.
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Against an evolving economic backdrop, Dollar Tree is focusing on factors within its control, including the rollout of key transformation initiatives like the multi-price strategy. The underlying premise is that the company can provide a more relevant assortment to customers if it can offer items at a variety of price points.
“Dollar Tree's multi-price expansion continues to resonate with our customers, and the 1,600 stores that have been converted into our newest in-line format are seeing an outsized sales lift,” said Creedon.
He added, “We also believe that, over time, our expanded discretionary multi-price offerings will help us overcome some of the macro-driven weakness we're seeing elsewhere in the portfolio.”
While the company’s transformation includes operational and business improvements, like the multi-price rollout at Dollar Tree, it also includes the strategic review of the Family Dollar business.
During Q4 of fiscal 2023, Dollar Tree revealed that it had initiated a comprehensive review of its store portfolio to address locations that aren't aligned with the company's transformative vision. This involved identifying stores for closure. As of Aug. 3, the company has closed approximately 655 stores and expects to close an additional 45 during the remainder of fiscal 2024.
“The actions we took earlier this year at Family Dollar to close underperforming stores are having the intended impact, and our remaining Family Dollar stores are focused on providing service and value to our customers across the country each and every day,” noted Creedon.
For example, Family Dollar’s private-brand program continues to gain momentum. “Private brands contributed 16% of consumable sales in the quarter, which puts us well ahead of schedule to hit our 70% year-end target,” observed Creedon. “Year to date, we've added 75 new SKUs across food, HBA and household products, and private brands now represent 9% of Family Dollar SKUs.”
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Meanwhile, the company continues to move ahead in growing its Dollar Tree banner. In late May, the retailer said that it acquired 170 leases of 99 Cents Only Stores across Arizona, California, Nevada and Texas. So far, the company has reopened more than 100 former 99 Cents Only locations as Dollar Trees. The remaining stores should reopen by the end of the year.
Revised Outlook
Because of its unsatisfactory Q2 performance, Dollar Tree was forced to revise its full-year outlook.
The company is adjusting its full-year fiscal 2024 consolidated net sales outlook range to $30.6 billion to $30.9 billion. It expects to deliver comparable-store net sales growth in the low single digits for the enterprise and both the Dollar Tree and Family Dollar segments.
Adjusted diluted EPS is expected to range from $5.20 to $5.60.
“We are taking a more conservative view toward comp sales in the back half of the year, particularly in the Dollar Tree segment, as macro factors continue to weigh on customer sentiment and adversely affect discretionary demand and buying behavior,” said CFO Jeff Davis.
For Q3, the company expects that consolidated net sales will range from $7.4 billion to $7.6 billion, based on comparable-store net sales growth in the low single digits for the enterprise and both the Dollar Tree and Family Dollar segments.
Adjusted diluted EPS is estimated to be in the range of $1.05 to $1.15. The EPS outlook reflects the revised sales outlook and approximately 7 cents of incremental upfront costs associated with the acquisition and reopening of the acquired 99 Cents Only Stores leases.
Chesapeake, Va.-based Dollar Tree operates more than 16,000 Dollar Tree, Family Dollar and Dollar Tree Canada stores across 48 states and five Canadian provinces. The company is No. 20 on The PG 100, PG’s 2024 list of the top food and consumables retailers in North America.
