Dollar Tree's stock heads for worst day in 2 decades after a big earnings miss

By Tomi Kilgore

Dollar Tree sales were hurt by increasing pressure on higher-income customers, which is different than what rival Dollar General said

Shares of Dollar Tree Inc. were suffering their biggest selloff in 23 years on Wednesday, after the discount retailer reported fiscal second-quarter earnings that fell well short of expectations and slashed its full-year outlook.

While more customers visited both the Dollar Tree and Family Dollar stores, they spent less on average, as increasing pressure on Dollar Tree's (DLTR) more affluent customers led to disappointing sales.

"As we have seen for several quarters now, demand from Family Dollar's core lower income customer remains weak," said Chief Operating Officer Michael Creedon, according to an AlphaSense transcript of the post-earnings call with analysts.

"Dollar Tree has a broader customer base that includes more middle and upper-income households and beginning this quarter, we started to see inflation, interest rates and other macro pressures have a more pronounced impact on the buying behavior of these customers," Creedon said.

That's a little different than what rival Dollar General Corp. (DG) said last week, when its stock suffered a record one-day selloff as continued pressure on its core lower-income customer led to its earnings miss.

Dollar Tree's stock plummeted 19.6% in morning trading, toward the lowest close since March 18, 2020.

The stock was also headed for its biggest one-day drop since it shed 24.8% on March 15, 2001. It has now plunged 34.3% amid a nine-day losing streak.

Dollar General's stock suffered in sympathy, as it slumped 2.6% toward a seven-year closing low.

Dollar Tree reported earlier Wednesday that net income for the quarter to Aug. 3 dropped to $132.4 million, or 62 cents a share, from $200.4 million, or 91 cents a share, in the same period a year ago.

Excluding nonrecurring items, adjusted earnings per share of 67 cents missed the FactSet consensus of $1.04. That marked the biggest miss in at least five years, according to available data from FactSet.

"While the vast majority of this variance was attributable to an adjustment of our general liability accrual, a portion was attributable to a [comparable-sales] shortfall which reflected the increasing effect of macro pressures on the purchasing behavior of Dollar Tree's middle- and higher-income customers," said Chief Financial Officer Jeff Davis. (See more about the liability accrual below.)

Net sales grew 0.7% to $7.37 billion but were below the FactSet consensus of $7.49 billion, to mark a fourth straight quarterly miss.

Same-store sales, or sales of stores open at least 15 months, increased 0.7%, below the FactSet consensus of a 1.5% rise. Traffic increased by 1.1%, but the average ticket decreased by 0.5%.

Included in those results were same-store sales growth of 1.3% for Dollar Tree-branded stores, which fell below the FactSet consensus of a 2.9% increase, and a 0.1% decline for Family Dollar-branded stores, which beat expectations of a 0.4% fall.

Traffic was up 1.4% at Dollar Tree stores and rose 0.7% at Family Dollar stores, but the average ticket slipped 0.1% at Dollar Tree and fell 0.8% at Family Dollar.

COO Creedon said the consumables category, which includes items such as candy, apparel, snacks and beverages, was the best performing areas during the quarter, while the higher-margin discretionary category, which includes products such as crafts, floral and home decor, underperformed.

Looking ahead, the company expects adjusted EPS of $1.05 to $1.15 for the current quarter, compared with the current FactSet consensus of $1.32.

For fiscal 2024, the company lowered its guidance range for adjusted EPS to $5.20 to $5.60 from $6.50 to $7.00, for net sales to $30.6 billion to $30.9 billion from $31 billion to $32 billion and for same-store sales growth to the low-single digits percentage range from low-to-mid-single digits.

CFO Davis provided some details about the general liability claims booked during the quarter. He said given the size of the company, it manages "thousands" of claims stemming from customer accidents and other incidents in and around its stores.

"Over time, the ultimate outcome of claims, particularly older claims during the pandemic and post-pandemic timeframe has become increasingly challenging to predict given the higher settlement and litigation costs that have resulted from a more volatile insurance environment," Davis said.

He believes the adjustment for claims taken to earnings in the second quarter captures the range of potential outcomes.

Regarding the announcement in June that it had initiated a formal review of the Family Dollar business, which could include a potential sale, spinoff or other disposition, Dollar Tree said it has not set a deadline or timetable to complete the review.

And for the store portfolio-optimization review announced in the fourth quarter of fiscal 2023, the company said as of Aug. 3 it has closed 655 stores identified as underperforming and expects to close another 45 stores during the rest of fiscal 2024.

Dollar Tree's stock has plunged 53.8% year to date, while Dollar General shares have tumbled 40% and the S&P 500 index has gained 16.1%.

-Tomi Kilgore

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09-04-24 1054ET

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