Dollar Tree says macro environment is one of the most difficult ‘we’ve ever seen’

The writing was on the wall for Dollar Tree days before the discount retailer’s second quarter earnings call on Wednesday. 

Dollar General’s poor Q2 results last week dropped Dollar Tree’s stock price by as much as 20%, and the Chesapeake, Va.-based company tempered earnings results for the rest of the year following a soft second quarter that saw same-store net sales come in below expectations with a decrease of 0.7% at the enterprise level. Dollar Tree stores reported an increase of just 1.3% year over year, while Family Dollar net sales dropped 0.1%. 

Consolidated sales company wide increased 0.7% to $7.37 billion. 

Operating income dropped 29.4% year over year to $203.1 million while gross profit increased 3.7% to $2.21 billion. 

Wall Street responded accordingly as Dollar Tree shares dropped more than 16% by midday Wednesday. 

“As we have seen for several quarters now, demand for Family Dollar’s core lower-income customer remains weak,” Dollar Tree CEO Mike Creedon said during the call. “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.”

Dollar General told the same story during its second quarter earnings call and revealed in a recent survey customers expect to have trouble paying bills over the next six months. 

Creedon calls the current macro environment “one of the most challenging…we’ve ever seen.” 

Dollar Tree is putting its faith into the retailer’s multi-price expansion. Over 1,600 stores have converted to the in-line format, and comps were up 4.6% in Q2 compared to other formats, which saw comps at less than half a percent. 

During its first quarter earnings call, Dollar Tree announced it would be offering products for as much as $7, calling the move the “next exciting chapter.” In 2023, the retailer made the move to elevate prices to $3 and $5. 

“We are very pleased with these early results,” said Creedon. “We also believe that over time our expanded discretionary multi-price offerings will help us overcome some of the macro-driven weaknesses we are seeing elsewhere in the portfolio.” 

Right now less than 15% of SKUs are multi-price for Dollar Tree, which has reopened about 85 former 99 Cents Only locations as Dollar Trees, and another 20 stores will relaunch tomorrow. The company acquired the designation rights for 170 leases of 99 Cents Only Stores back in May. 

Despite the lackluster performance in the second quarter, Dollar Tree’s mood seems to be improving. Just two months ago the retailer initiated a formal review of strategic alternatives for the Family Dollar brand, which could include a potential sale, spinoff, or other disposition of the business. About 600 underperforming Family Dollar stores have been closed. 

“The unique needs of each banner at this time—transformation at Family Dollar and growth acceleration at Dollar Tree—lead us to the decision to conduct a thorough review of strategic alternatives for the Family Dollar business. Our goal is to position both the Dollar Tree and Family Dollar banners to progress further and faster, and to determine whether the exclusive attention of a dedicated team will benefit both, while creating value for Dollar Tree shareholders and other stakeholders,” said Rick Dreiling, chairman and chief executive officer.

In early August, Family Dollar entered into a partnership with First Insight, Inc. The initiative is set to refine Family Dollar’s merchandise assortment strategy by leveraging predictive analytics and actionable data. 

Dollar Tree is adjusting its full-year fiscal 2024 consolidated net sales outlook range to $30.6 billion to $30.9 billion. The company 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. 

For the third quarter, Dollar Tree expects consolidated net sales to range between $7.4 billion to $7.6 billion and comparable store net sales growth in the low single digits.