Dollar Tree stumbles to nine year low

Dollar Tree (DLTR) reported a disappointing Q2 earnings result, missing both revenue and earnings per share (EPS) expectations. The company posted Q2 revenue of $7.37 billion, slightly below the consensus estimate of $7.49 billion. EPS came in at $0.67, significantly missing the expected $1.05. The company also saw weak performance in its same-store sales, with a 0.7% increase across its enterprise, driven by a 1.3% rise at Dollar Tree and a 0.1% decline at Family Dollar.

The company revised its full-year guidance downward, lowering its expected FY24 adjusted EPS to a range of $5.20-$5.60, down from $6.50-$7.00. It also cut its revenue guidance to a range of $30.6 billion to $30.9 billion, below the previous forecast of $31 billion to $32 billion. This guidance reflects Dollar Tree's anticipation of continued macroeconomic pressures, especially on middle- and higher-income consumers, and strategic challenges within its Family Dollar segment.

Key drivers of the weak performance include higher SG&A expenses, which pressured operating margins. The company reported a contraction of its operating margin to 3.0%, down from 4.2% the previous year. This was due to higher general liability claims, depreciation, labor, and utility costs. Gross margin, however, improved by 87 basis points to 30%, benefiting from lower freight costs but offset by product cost inflation and higher occupancy and distribution costs.

Family Dollar continues to underperform, with a comparable sales decline of 0.1% and operating margin contraction to negative 0.1%. In contrast, Dollar Tree saw a 1.3% increase in comp sales and an 8.5% operating margin. The company has been actively addressing the challenges at Family Dollar, including a strategic review of alternatives for the business, which may result in a sale, spinoff, or other actions.

Looking ahead, Dollar Tree provided Q3 guidance with expected EPS between $1.05 and $1.15, below the consensus estimate of $1.32. The company anticipates total sales of $7.4 billion to $7.6 billion, with comparable sales expected to grow at a low single-digit rate for both Dollar Tree and Family Dollar. The company also flagged headwinds from the reopening of recently acquired 99 Cents Only Stores and higher depreciation and amortization costs.

Despite the disappointing results, Dollar Tree is continuing with its long-term transformation efforts, including the planned closure of underperforming Family Dollar stores. The company has already closed 655 locations and expects to close an additional 45 by the end of FY24. However, the results have raised concerns about the effectiveness of its strategy and the overall impact of macroeconomic pressures on the discount retail space.