Retailer cuts full year earnings forecast as costs rise
CHESAPEAKE, Va. — Dollar Tree Inc. continued to make progress in its first quarter ended April 29, reporting sales gains and more transactions in its stores. But earnings were hurt by increased shrink and a shift in consumer spending to less profitable merchandise.
“Our initiatives to drive customer traffic and increase store productivity are having the desired impact,” Dollar Tree chairman and CEO Rick Dreiling said. “The Dollar Tree segment delivered a 3.4% comp, successfully cycling the 11.2% comp from the prior year’s quarter. Family Dollar continued its sales momentum with a 6.6% same-store sales increase. Importantly, both segments experienced a mid-single-digit percent step-up in comp traffic. We are clearly gaining market share across the entire enterprise.”
Dreiling noted that Dollar Tree’s initiatives are yielding positive results, but the company is facing headwinds from external factors, including the economic environment in which it operates.
“While we are seeing early results from our initiatives,” Dreiling said, “we are not immune to the external pressures affecting all of retail, notably, the margin impact of elevated shrink and the product mix shift to consumables.”
“While we are maintaining our full-year 2023 sales outlook, we are adjusting our EPS outlook as we expect the elevated shrink and unfavorable sales mix to persist through the balance of the year. We still expect earnings to be more back-end loaded this year as the benefits of lower ocean freight rates flow through. We are eager to share more details on the current operating environment and our longer-term strategic growth plans at our upcoming investor conference on June 21st.”
Consolidated net sales increased 6.1% to $7.32 billion. Enterprise same-store sales increased 4.8%. Dollar Tree same-store sales increased 3.4%, driven by a 5.5% increase in traffic, partially offset by a 2.1% decline in average ticket. Family Dollar’s 6.6% same-store sales increase was comprised of a 4.3% increase in traffic along with a 2.2% increase in average ticket.
Gross profit decreased 4.7% to $2.23 billion and gross margin declined 340 basis points to 30.5%. The prior year’s quarter included an outsized margin benefit from the initial transition to the $1.25 price point at Dollar Tree. The gross margin decline was driven by lower initial mark-on, an unfavorable sales mix and shrink, partially offset by lower freight costs.
Selling, general and administrative expenses were 24.8% of total revenue, compared to 23.3%. The current year’s quarter included a $30.0 million, or $0.12 per diluted share, charge to the Company’s legal reserve for previously detailed matters in a Family Dollar distribution facility in Arkansas. Excluding this charge, SG&A expenses were 24.4% of total revenue. The increase was primarily due to higher costs for store and field payroll, higher expenditures related to repairs and maintenance to improve store standards, and professional fees, partially offset by comparable store net sales leverage.
Operating income was $419.7 million and operating margin was 5.7%. Adjusted operating income was $449.7 million, and adjusted operating margin was 6.1%.
The Company’s effective tax rate was 24.1%, compared to 23.1% last year. Net income was $299.0 million (down from $536.4 million in the prior year period) and diluted EPS was $1.35. Adjusted diluted EPS was $1.47.
The Company repurchased 1,025,000 shares for $151.1 million.
In the first quarter, Dollar Tree opened 107 new stores, relocated 33 stores, and closed 29 stores. It expanded its multi-price Plus offering to an additional 408 Dollar Tree stores, and completed 252 Family Dollar store renovation projects.
“We are rapidly executing on a multi-faceted plan to fundamentally transform and improve the operating performance of Dollar Tree and Family Dollar for the long-term,” Dreiling said. “I am encouraged by our early progress and traction on initiatives to improve our shoppers’ experience and drive store productivity. We are very confident in our plan and feel we are in control of our Company’s destiny.
“We believe both Dollar Tree and Family Dollar have a clear path to accelerated sales growth and margin expansion over the next three to five years. Our distinctive and proven initiatives are being led by a world-class retail management team and are being executed by more than 200,000 associates that are eager to succeed.”
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