Dollar Tree Beats Q2 Estimates but Comes Up Short on Margins

Dollar Tree Inc. (DLTR) posted stronger-than-expected earnings for the quarter ended July 29, as the discount retailer lured inflation-weary shoppers and benefited from higher sales at its flagship stores but was pressured by narrower margins.

Net income totaled $200.4 million, or 91 cents a share, down from $360 million, or $1.60 per share in the same quarter last year, which marked a second-quarter record. The results topped consensus estimates of 87 cents a share. Net sales, which combine the revenue of the company's three main stores—Dollar Tree, Family Dollar, and Enterprise—were up 8.2% to $7.32 billion.

The company's flagship Dollar Tree stores posted same-store sales growth of 7.8%, while Enterprise and Family Dollar increased theirs by 6.9% and 5.8%, respectively. Foot traffic at Dollar Tree stores rose 9.6%, which helped compensate for a 1.6% decline in average ticket volume. Traffic at Family Dollar stores rose 3.4%, with the average ticket also up 2.3%.

On the downside, gross margin, or the amount of revenue a company retains after direct sales expenses are factored in, fell 220 basis points to 29.2%, reflecting lower mark-ons—the difference between what a good costs to produce and what it sells for—and an unfavorable sales mix. The company also cited higher "shrink," the loss of inventory, often to theft.

"While factors like sales mix and elevated shrink continue to pressure margins, we generated a year-over-year increase in gross profit dollars," said Rick Dreiling, the company's chairman and CEO.

Retaining Inflation-Weary Customers

Thanks to its lower-priced and discount offerings, Dollar Tree has been able to retain inflation-weary shoppers who have otherwise pulled back on discretionary spending. It's so far been able to avoid the slowdown that has affected higher-priced retailers such as Target (TGT), whose discretionary sales have lagged in recent quarters.

Dollar Tree also expanded its footprint nationwide, opening 118 new stores in the latest quarter and completing 276 renovation projects across its Family Dollar chain of stores.

The company revised its full-year outlook higher, and now expects net sales in a range of $30.6 billion to $30.9 billion, up from the previous range of $30 billion to $30.5 billion forecast issued in May. Current-quarter sales are forecast at $7.3 billion to $7.5 billion, with earnings per share (EPS) projected to improve to a range of 94 cents to $1.04.

Dollar Tree shares were trading about 10% lower in midday trading Thursday, as the company's margin declines added to investors' retail concerns. The stock is down 11% so far this year.

Settlement With Labor Department

On Aug. 17, Dollar Tree reached a settlement with the Labor Department's Occupational Safety and Health Administration (OSHA) to improve safety standards at the company's stores. Dollar Tree will be required to update its workplace safety protocols, including ensuring easier access to emergency exits, fire extinguishers, and electrical panels, and to implement safer storage practices.

Failure to do so would yield a fine of $100,000 per day of violation, up to a $500,000 maximum, along with OSHA inspection and enforcement actions.

"This agreement focuses on improving working conditions at thousands of stores nationwide," said OSHA Assistant Secretary Doug Parker, saying that Dollar Tree and Family Dollar "have agreed to significant investments to more effectively identify and correct the root causes of the hazards most commonly found during OSHA inspections."